Labor conditions continue to cool as unemployment surges to 3.8%

A direct read of the August jobs report tells an interesting story — one in which job creation perked up a bit, although a quick read of the headline number wouldn’t make that immediately apparent. In fact, the 187,000 new workers added to payrolls last month marks the lowest single-month gain relative to previously reported data since late 2020.

The game changer? The report also contained significant downward revisions to job creation totals for the prior two months, slashing 110,000 jobs off the previously reported totals to 105,000 in June and 157,000 in July.

The three-month increase in nonfarm payrolls of just 449,000 is the weakest since the labor markets began their recovery in mid-2020.

The unemployment rate surged from 3.5 to 3.8%, topping forecasts, while matching a level last seen in February 2022. Slower job creation played a role, but an uptick in labor force participation — the portion of the civilian population actually in the labor force — was the more significant driver. The labor force is estimated to have grown by more than 700,000 in August, easily outstripping a more pedestrian increase of about 220,000 individuals employed, according to the household survey.

The report also suggested that wage growth — a key concern for Fed policymakers — is moderating. Average hourly earnings rose by 0.2% for the month, a pace that should be much more palatable to the Fed as they work to get the inflation genie back in the bottle. The year-over-year increase of 4.3% was little changed from the prior month, but if August is any indication of what’s to come, a sustained reduction in monthly advances should surface in the trailing one-year numbers in the months ahead.

Coupled with recent data on job openings and quits, the August jobs report helps to round out growing indications that labor market conditions are normalizing and that the pandemic-related distortions should continue fading.

The greater question is whether the sustained easing in labor market conditions will end in a stable glide path and an economy that can level off or whether the cumulative impact of Fed tightening will overshoot. Coincident economic data has shown a resiliency in the economy in the face of tightening that’s led to a reemergent optimism about the potential for a soft landing. Leading indicators have yet to turn the corner though, keeping the door open to the risk that this “most anticipated recession ever” may not be avoided, but simply delayed.

For investors, that may be a worry for another day though. Signs of cooling are still good news, supporting a hopeful optimism that the end of the rate hike cycle may be near, with the potential that the Fed could cut rates in the coming year should inflation continue to subside.

It’s the subtle difference between a weaker jobs report and a weak jobs report that matters. Unless and until greater evidence of a more pronounced slowdown leading to outright job losses emerges, there appears to be enough good news to keep near-term recession worries at bay for now.

The bottom line? Labor conditions continue to cool as the tangible effects of the Fed’s inflation playbook filter into the real economy. For now, the slowdown hasn’t reached stall speed, and the economy remains on a growth trajectory. Whether or not that can be sustained will depend on the degree to which prior rate hikes weigh further on growth and the extent to which policymakers deem additional tightening is needed to ensure a return to the Fed’s inflation target. 

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