The U.S. economy created slightly fewer jobs than expected in August, reflecting a slowing labor market and clearing the way for the Federal Reserve to cut interest rates later this month.
Nonfarm payrolls rose by 142,000 this month, down from 89,000 in July and below the Dow Jones consensus forecast of 161,000, according to a report released Friday by the U.S. Department of Labor’s Bureau of Labor Statistics.
At the same time, the unemployment rate fell to 4.2% as expected.
Although the labor force participation rate remained at 62.7%, the labor force increased by 120,000 people this month, pushing the unemployment rate down 0.1 percentage point. Another measure, which includes discouraged workers and people working part-time for financial reasons, edged up to 7.9%, the highest reading since October 2021.
Markets initially reacted little to the data, with index futures trading negative and Treasury yields also moving lower.
While August’s data was close to expectations, data for the previous two months saw significant downward revisions. The Bureau of Labor Statistics lowered July’s total by 25,000 to 118,000 in June, a downward revision of 61,000.
From an industry perspective, construction led the way with 34,000 new jobs. Other areas that saw significant growth included health care (up 31,000) and social assistance (up 13,000). Manufacturing lost 24,000 jobs this month.
In terms of wages, average hourly wages increased by 0.4% from the previous quarter and 3.8% annually, both higher than expectations of 0.3% and 3.7%. Working hours edged up to 34.3 hours.
The report comes as markets are nervous about the next step for the Federal Reserve, which has held interest rates steady since July 2023 after implementing a series of sharp hikes to reduce inflation.
Before the news was released, the market had been believing that there was a 100% chance that the Federal Reserve would start cutting interest rates at its meeting on September 17-18. The only question is how much.
According to CME Group’s FedWatch indicator, after the release of non-farm payrolls data, the pricing tendency of the futures market dropped by half a percentage point.
“For the Fed, the decision comes down to deciding which risk is greater: the risk of renewed inflationary pressures if rates are cut by 50 basis points, or the threat of recession if rates are cut by just 25 basis points,” said Chief Global Officer Seema Seema Shah said. “Overall, as inflationary pressures subside, there is no reason for the Fed not to err on the side of caution and cut rates sooner.”
Recent economic data suggests the labor market continues to grow but is slowing. Payroll firm ADP reported Thursday that the private sector added just 99,000 jobs in August, while outplacement firm Challenger, Gray & Christmas reported a surge in layoffs in August and hiring at a pace not seen so far this year since at least 2005 The slowest level.
Most Fed officials said they also expected rates to fall. In a key annual speech at the Fed’s secret meeting in Jackson Hole, Wyoming, Fed Chairman Jerome Powell declared that “the time has come” to adjust policy, but he did not specify what that meant.
New York Fed President John Williams supported a rate cut in a speech Friday morning.
“Given that the economy is currently in equilibrium with inflation approaching 2%, it is appropriate to make the policy stance less restrictive by lowering the target range for the federal funds rate,” Williams said in a speech before the meeting. New York Diplomacy Relations Committee.
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