Fewer Jobs Added in August Amid Lower Unemployment Rate
The US economy added fewer jobs in August than economists had predicted. Data from the Bureau of Labor Statistics, released on Friday, revealed that nonfarm payrolls increased by 142,000. This figure fell short of the 165,000 job additions expected by analysts.
In contrast, the unemployment rate dropped to 4.2%, down from 4.3% in July. The August job gains were higher than the revised 89,000 jobs added in July. However, revisions to both June and July labor reports indicated that 86,000 fewer jobs were created in those months than initially reported.
Wage Growth Shows Strength
Wage growth, a critical measure for assessing inflationary pressures, saw a notable rise in August. Year-over-year wage growth hit 3.8%, up from the 3.6% gain recorded in July. On a monthly basis, wages rose by 0.4%, which exceeded the previous month’s increase of 0.2%. These figures suggest that wage pressures remain elevated, potentially influencing inflation dynamics and the Federal Reserve’s decision-making process.
Economy Likely Experiencing a ‘Soft Landing’
Despite the slower job growth, some economists believe the US economy is still heading toward a soft landing, rather than a full-blown recession. Paul Ashworth, Chief North America Economist at Capital Economics, remarked in a note to clients that the August jobs report aligns with an economy that is gradually cooling down but not collapsing.
Ashworth’s comments reflect a broader sentiment among economists that, while the labor market is losing steam, it may not yet indicate a severe downturn. This has implications for the Federal Reserve’s approach to interest rate cuts in the coming weeks.
August Jobs Report – Fed’s Interest Rate Cut in Focus
The release of the August jobs report has intensified the ongoing debate about how aggressively the Federal Reserve should cut interest rates. During a late-August speech, Federal Reserve Chair Jerome Powell highlighted the “unmistakable” cooling in the labor market. He also emphasized that the Fed does not seek or welcome further weakening in employment conditions.
The report comes just weeks before the Fed’s upcoming meeting, where policymakers are expected to cut interest rates. The question remains whether the Fed will opt for a modest 25-basis-point cut or a larger 50-basis-point reduction.
August Jobs Report – Signs of Labor Market Cooling Intensify
Earlier this week, additional data supported the narrative of a cooling labor market. ADP’s National Employment Report for August showed that private payrolls grew by only 99,000 jobs, falling well short of economists’ forecasts for 145,000 jobs. This marked the fifth consecutive month of slowing payroll growth. Moreover, July ended with the lowest number of job openings since January 2021, further indicating weakening demand for labor.
These trends suggest that the labor market may be losing momentum more quickly than anticipated, raising concerns about the broader economic outlook.
Economists Debate Rate Cut Size
While the August jobs report showed some signs of strength, many economists believe it will not be enough for the Federal Reserve to make a large rate cut this month. Nationwide’s Chief Economist Kathy Bostjancic commented in a note to clients that the combination of modest payroll gains, a drop in unemployment, and higher average hourly earnings does not warrant a 50-basis-point rate cut at the Fed’s September meeting.
However, Bostjancic also pointed to the downward revisions in prior months’ job numbers and the narrow distribution of job gains across sectors. This, she argued, highlights that the labor market is weakening more quickly than expected. As a result, the Fed may consider a larger rate cut at one of its future meetings if the trend continues.
Market Expectations Shift
Traders are increasingly factoring in the possibility of more significant interest rate cuts by the end of the year. According to Bloomberg data, markets are pricing in over 100 basis points of rate cuts from the Fed in 2024. By Friday morning, the CME FedWatch Tool showed that markets had assigned a 45% probability of a 50-basis-point rate cut at the Fed’s September meeting, up from just 30% the previous week.
This shift reflects growing market sentiment that the Fed will need to act more aggressively to counteract economic slowing.
Looking Ahead to the Fed’s Decision
As the Federal Reserve’s September meeting approaches, all eyes are on how policymakers will respond to the evolving economic landscape. With the labor market showing signs of cooling, wage growth persisting, and inflation concerns remaining, the Fed faces a delicate balancing act.
While some economists are pushing for a smaller rate cut to avoid overstimulating the economy, others believe the weakening labor market justifies a more aggressive approach. For now, traders and investors will continue to monitor upcoming economic data and Fed communications to gauge the central bank’s next move.
