US job growth solid in August; Labor market pressures begin to ease

  • Non-farm payrolls rise by 315,000 in August
  • Unemployment rate rises to 3.7% from 3.5% in July
  • The average hourly wage increases by 0.3%; 5.2% more than in the previous year
  • The average working week falls from 34.6 hours to 34.5 hours

WASHINGTON, Sept 2 (Reuters) – US employers hired more workers than expected in August, but modest wage growth and a rise in the unemployment rate to 3.7% indicated the beginning of an easing in the labor market, prompting cautious optimism that the Federal Reserve could slow the economy without triggering a recession.

Friday’s closely-watched jobs report from the Labor Department, which also showed 107,000 fewer jobs created in June and July than originally estimated, failed to decisively settle the debate over whether the Federal Reserve would deliver a third of 75 basis points or a half-percent point rate hike at its policy meeting this month.

The rise in the unemployment rate to a six-month high came as nearly 800,000 people entered the labor market, pushing the number of people in work to a record high. The labor market remains strong, underscoring the resilience of the economy despite the contraction in gross domestic product in the first half of 2022.

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“The increase in employment is another rebuttal to the notion that the economy is already in recession,” said Michael Feroli, chief US economist at JPMorgan in New York. “The report gives hope that a soft landing is still possible.”

The business survey showed nonfarm payrolls rose by 315,000 jobs last month after rising by 526,000 in July. August marked the 20th consecutive month of job growth. Employment is now 240,000 jobs above pre-pandemic levels.

Economists polled by Reuters had forecast an increase in the workforce of 300,000, with estimates ranging from 75,000 to 450,000.

Some economists warned against reading too much into the slowdown in wage growth in August, noting that last month’s business survey response rate was the lowest since 2006. Response rates were historically lower in August, when most Americans take their summer break.

There is a tendency for August initial payrolls to be revised significantly higher.

“Over the past five years, the average upward revision between the first and third estimates is nearly 120,000,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Therefore, August job growth could be stronger than first appears.”

The broad surge in new hires last month was led by the professional and business services industry, which added 68,000 new jobs. The number of people employed in healthcare rose by 48,000 jobs.

Employment in the retail sector rose by 44,000 jobs, while manufacturing added 22,000 jobs. Construction employment rose by 16,000 jobs.

The number of people employed in leisure and hospitality rose by 31,000, down from an average of 90,000 per month in the first seven months of the year. Employment in the leisure and hospitality industry remains 1.2 million jobs below pre-pandemic levels.

Pay slips outside of agriculture

Fed Chair Jerome Powell last week warned Americans are facing a painful period of slow economic growth and possible rising unemployment as the central bank aggressively tightens monetary policy to quell inflation.

The Fed raised its key interest rate twice in June and July by three-quarters of a percentage point. Since March, it has raised that rate from near zero to its current range of 2.25%-2.50%. According to CME’s FedWatch tool, financial markets are pricing in a roughly 58.0% chance of a 75 basis point hike at the September 20-21 Fed meeting. That is less than 70% before the release of the employment report.

August consumer price data, due mid-month, will also be a key factor in determining the size of the next rate hike.

Stocks on Wall Street traded higher. The dollar fell against a basket of currencies. US Treasury bond prices rose.

WORKFORCE RISING

While the unemployment rate rose to 3.7% from a pre-pandemic low of 3.5% in July, it was as 786,000 people entered the labor market. The biggest increase since January has pushed headcount to an all-time high, surpassing the previous record set in December 2019.

As a result, the employment rate, or the proportion of working-age Americans who have a job or are looking for a job, rose to 62.4% from 62.1% in July. It remains one percentage point below its pre-pandemic level.

labor market participation

The rising labor pool, if sustained, would help narrow the gap between labor supply and demand. On the last day of July there were 11.2 million job vacancies, with two job vacancies for every unemployed person.

“This is a pressure relief valve that could help the Fed do its job of bringing inflation down and achieving a soft landing,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management in Dallas.

However, some economists are skeptical that the labor pool will continue to grow, pointing out that August’s surge was driven by seasonal factors and rising labor force participation among prime-aged workers.

The participation rate of this cohort is now above the 2019 average.

“We expect the downward trend in the unemployment rate to continue in September,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

Wage growth slowed, with average hourly wages rising 0.3% after rising 0.5% in July. This put the annual wage increase in August at 5.2%. Strong wage increases ensure that the income side of economic growth expands, albeit at a moderate pace, and keeps a recession at bay for now.

The average weekly working time fell to 34.5 hours from 34.6 hours in July, a possible sign that companies are starting to reduce their working hours due to the economic uncertainty.

The number of people working part-time for economic reasons rose to 4.1 million from 3.9 million in July.

underemployment

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Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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