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The latest nonfarm payroll report for August hints at a labor market that is decelerating, yet still having some resilience. While payrolls increased by a solid 142,000 jobs, they fell well short of the 160,000 new jobs that economists were expecting. Despite the employment growth still being positive, the underlying numbers indicate that momentum is weakening, especially compared to the job gains in the early part of the year.
In addition to the slowdown in August, the jobs number for July was revised down by 25,000 jobs to just 114,000 new jobs added that month.
One area of concern lies in the underperformance of certain sectors. Manufacturing, for example, has been hit particularly hard, shedding 24,000 jobs in August, reflecting a broader trend of factory job losses, exacerbated by global economic uncertainties and trade challenges. Retail also lost 11,000 jobs, and the 3rd consecutive month of negative job growth for the sector. There are pockets of strength, such as the Leisure and Hospitality sector, that added 46,000 jobs and the construction sector, which added 34,000 jobs in August. However, the ongoing decline of homes under construction does add uncertainty about the sustainability of growth in construction employment.
The unemployment rate fell slightly to 4.2% from 4.3% in July, right in line with expectations and signaling that while hiring is slowing, layoffs remain muted. That said, the trend in unemployment has been rising since the low in mid 2023, and has reached a level, relative to the past twelve months suggesting an upcoming recession according to the Sahm Rule.
Wage growth in August came in slightly above expectations, with average hourly earnings rising 0.4%, bringing the year-over-year increase to 3.8%. Although this uptick could raise concerns about inflationary pressures, the broader loosening in the labor market suggests that wage growth may not be as much of a threat to inflation as once feared. Labor productivity has also been stronger than expected, which could offset some of the inflationary effects of wage increases.
As we are all looking ahead to the FOMC meeting on September 17 – 18, what does this report mean for their upcoming policy decision. With the labor market cooling, the case for a rate cut is becoming increasingly stronger. In fact, many economists and analysts are calling for a 50-basis point cut, arguing that the Fed’s policy stance remains too restrictive given the downside risks to employment. The markets are predicting a near 100% probability that the Fed will begin rate cuts this month, however, they have varied significantly over whether that will be a 25 bp cut or a 50 bp cut. There are two more important data points coming out before the meeting as we get both the CPI and PPI reports on inflation this week. The consensus expectations on these numbers are primarily for inflation to remain stable at current levels, and outside of an unexpected spike, we think the Fed is certain to begin rate cuts this month.