The U.S. economy created slightly fewer jobs than expected in August, reflecting a slowing labor market while also paving the way for the Federal Reserve to cut interest rates later this month.
Nonfarm payrolls rose by 142,000 jobs during the month, up from 89,000 in July and below the Dow Jones consensus forecast of 161,000, according to a report released Friday by the Labor Department's Bureau of Labor Statistics.
Meanwhile, the unemployment rate fell to 4.2%, as expected.
The labor force rose by 120,000 jobs during the month, helping to push the unemployment rate down by 0.1 percentage point, though the labor force participation rate remained at 62.7%. An alternative measure that includes discouraged workers and those working part-time for economic reasons rose to 7.9%, its highest reading since October 2021.
The household survey, which is used to calculate the unemployment rate and is often more volatile than the establishment survey, showed employment increased by 168,000 jobs. However, the balance was tilted toward part-time employment, which increased by 527,000 jobs, while full-time employment fell by 438,000 jobs.
Markets showed little initial reaction to the data, with stock futures remaining negative and Treasury yields falling. However, stocks saw a sell-off later in the session.
While August’s numbers were close to expectations, the previous two months saw significant downward revisions. The Bureau of Labor Statistics cut total job openings in July by 25,000, while June’s job openings fell to 118,000, a downward revision of 61,000.
“I don’t like this very much,” said Dan North, chief North America economist at Allianz Trade. “It’s not a disaster, but it’s below the headlines, and what really bothers me is the revisions. This is definitely going in the wrong direction.”
From a sector perspective, construction led job growth, adding 34,000 jobs. Other gainers included health care, which added 31,000 jobs, and social assistance, which grew by 13,000 jobs. Manufacturing lost 24,000 jobs during the month.
On the wage front, average hourly earnings rose 0.4% month-over-month and 3.8% from a year ago, both above estimates of 0.3% and 3.7%, respectively. Working hours rose to 34.3 hours.
The report comes amid market jitters about what the Fed might do next, as it has held interest rates steady since July 2023 after a series of sharp hikes to slash inflation.
Before the data came out, markets were 100% expecting the Fed to start cutting rates when it meets on September 17 and 18. The only question was: How much would the Fed cut?
After the payrolls data was released, futures market prices briefly dipped toward a half-percentage point cut, but then turned to a quarter-percentage point, according to the CME Group's FedWatch gauge.
“For the Fed, the decision comes down to which is more risky: reigniting inflation pressures if they cut rates by 50 (basis points) or threatening a recession if they cut rates by just 25 (basis points),” said Seema Shah, chief global strategist at Principal Asset Management. “At the end of the day, with inflation pressures low, there’s no reason why the Fed shouldn’t be cautious and cut rates first.”
Recent economic data anecdotes point to continued growth but a slowing labor market. Payroll processing firm ADP reported Thursday that private companies added just 99,000 jobs in August, while employment firm Challenger, Gray & Christmas reported that layoffs rose sharply in August and that hiring was at its slowest pace since the start of the year since at least 2005.
The Bureau of Labor Statistics reported that the private sector added 118,000 jobs during the month, up from 74,000 in July. Government jobs increased by about 24,000 jobs.
Most Fed officials have signaled that they also expect to cut rates. In his keynote speech at the Fed’s annual conference in Jackson Hole, Wyoming, Chairman Jerome Powell declared that “the time has come” to adjust policy, though he offered no specifics about what that would mean.
In a speech Friday morning, New York Federal Reserve President John Williams backed interest rate cuts.
“With the economy now stable and inflation heading toward 2 percent, it is now appropriate to reduce the degree of tightening in the policy stance by lowering the target range for the federal funds rate,” Williams said in remarks to the Council on Foreign Relations in New York.
