First, the bottom line: Job creation has slowed to a crawl
- Anyone hoping for a reassuring rebound in job creation after three consecutive weak gains will be disappointed with the August jobs report, which fell well short of already tempered expectations. Job creation is mired in a lackluster range.
- A fractional uptick in the unemployment rate keeps the balance between supply and demand in a constructive range for the time being as the availability of potential workers remains limited.
- The August jobs report goes to the heart of Fed Chair Jay Powell’s characterization of the current state of the labor market being in a “curious balance.” It’s far from robust – the tepid hiring environment illustrates that point quite well. The totality of the data also suggests it’s not weak given the relatively low pace of jobless claims and unemployment modestly above 4%.
- The question is how long that “curious balance” can be maintained without a breakout move in either direction, either via a rebound in job creation or further slippage if employers pull back further. That question will be answered in the coming months.
- While a probable Fed cut later this month didn’t hinge on the August jobs report, the case for a cut was certainly solidified after a fourth consecutive month of weak job creation.
By the Numbers: Four consecutive months of weak job creation
- Nonfarm payrolls rose by a meager 22,000 in August — well below the consensus estimate of 75,000, marking the fourth consecutive month of weak job creation.
- Revisions to previously reported data also ratcheted down prior gains; the revision to June’s payrolls tipping to a single-month decline of 13,000 — the first negative month for payrolls since late 2020.
- The unemployment rate edged fractionally higher to 4.3%, its highest level in nearly four years, but still relatively solid in a longer-term context. The jobless rate has now risen by nearly 1% since the overheated labor economy drove unemployment down to 3.4% in April 2023.
- Job creation last month was still tightly clustered in a few industries, with education and health services and leisure and hospitality leading the way. Manufacturing, construction, and various other service industries saw job losses for the month, while government payrolls also declined. That’s far from the balance that would be consistent with broadly constructive labor market conditions.
- With every additional data point on the labor market that drops, the case for some sort of anomalous explanation for recent nonfarm payroll data is diminished. It’s increasingly clear that although layoffs have been rangebound, job creation has slowed to a near stall speed in recent months.
Broad Thoughts: Path cleared for September Fed cut and likely more
- Whatever the underlying cause — a scarcity of available workers, a more cautious hiring stance, or lingering questions about the near-term impact of tariffs —– labor conditions have cooled considerably in recent months.
- Whether or not the labor economy can sustain a positive trend against that weaker hiring backdrop remains to be seen, but the risk is significant enough to kick the door wide open for the Fed to cut its benchmark interest rate later this month. That’s effectively baked into the cake. More telling will be updated projections from the Fed and any additional insights that can be gleaned from Powell’s press conference following the rate decision. Those should provide greater insight into how much additional easing policymakers believe to be necessary to support the economy and stabilize the jobs market.
- Upcoming data on consumer inflation looms large for policymakers. The case for easing appears solid based on labor conditions, but the risk of a near-term inflationary resurgence may make them think twice about how aggressively they can cut rates without exacerbating upward pressure on prices and long-term inflation expectations.
- Moreover, there’s a growing risk that lower short-term rates may not extend to longer-term rates if there’s a worry that political influence is casting too heavy a shadow in Fed policy decisions or if near-term policy easing will fuel longer-term upside in inflation.
- That could introduce an argument for the Fed to lean back into quantitative easing to try to rein in long-term rates as well — critical to providing some juice to the housing market, where mortgage interest rates are more closely tied to long-term yields than the Fed funds rate.
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