The U.S. economy added slightly fewer jobs than expected in August, reflecting a slowing labor market while paving the way for the Federal Reserve to cut interest rates later this month.
Nonfarm payrolls rose 142,000 during the month, from 89,000 in July and below the Dow Jones consensus estimate of 161,000, according to a report on Friday from the Bureau of Labor Statistics of the Ministry of Labor.
At the same time, the unemployment rate fell to 4.2%, as expected.
The labor force grew by 120,000 in the month, helping the unemployment rate fall by 0.1 percentage point, although the labor force participation rate remained at 62.7 percent. An alternative measure that includes discouraged workers and those holding part-time jobs for economic reasons rose as much as 7.9%, the highest rate since October 2021.
The household survey, which is used to calculate the unemployment rate and is often more volatile than the business survey, showed employment increased by 168,000. The balance, however, leaned toward part-time employment, which rose by 527,000, while full-time employment fell by 438,000.
Markets showed little initial reaction to the data, with equity futures holding negative and bond yields also lower. However, shares sold off later in the session.
While the August numbers were close to expectations, the previous two months saw significant downward revisions. The BLS cut the July total by 25,000, while June fell to 118,000, a downward revision of 61,000.
“I don’t really like this. It’s not a disaster, but it’s below expectations on the headline and what really bothers me is the revisions,” said Dan North, senior economist for North America at Allianz Trade. “This is definitely going the wrong way.”
From a sectoral perspective, construction led the way with 34,000 additional jobs. Other big gainers included health care, up 31,000, and social assistance, which saw an increase of 13,000. Manufacturing lost 24,000 in the month.
On the wages side, average hourly earnings rose 0.4% month-on-month and 3.8% from a year ago, both higher than the respective estimates of 0.3% and 3.7%. Working hours increased to 34.3.
The report comes as markets brace for the next step for the Fed, which is on hold with interest rates until July 2023 after enacting a series of sharp hikes to curb inflation.
Going into the release, markets had priced in a 100% chance that the Fed would start cutting rates when it meets on September 17-18. The only question was how much.
After the payrolls were released, futures prices briefly fell by half a percentage point, but then rebounded by a quarter, according to CME Group. FedWatch meter.
“For the Fed, the decision comes down to deciding which is the greater risk: a resurgence of inflationary pressures if they fall by 50 [basis points] or threatens recession if they only reduce by 25 [basis points]” said Seema Shah, chief global strategist at Principal Asset Management. “On balance, with subdued inflationary pressures, there is no reason for the Fed not to proceed with caution and front-load rate cuts.”
The recent economic data narrative shows continued growth but a slowdown for the labor market. Payroll processor ADP said Thursday that private companies added just 99,000 jobs in August, while outplacement firm Challenger, Gray & Christmas said layoffs rose in August and hiring had its slowest year-over-year pace since at least in 2005.
The BLS report said the private sector added 118,000 jobs in the month, up from 74,000 in July. Government jobs increased by 24,000.
Most Fed officials said they also see interest rates coming down. In his annual keynote speech at the Fed’s annual meeting in Jackson Hole, Wyoming, Chairman Jerome Powell declared that “the time has come” to adjust policy, though he did not elaborate on what that meant.
In a speech on Friday morning, New York Fed President John Williams endorsed interest rate cuts.
“With the economy now in balance and inflation hovering around 2%, it is now appropriate to reduce the degree of restraint in the stance of policy by reducing the target range for the federal funds rate,” Williams said in remarks before the Foreign Affairs Council Relationships in New York.
