The U.S. labor market is definitely cooling. Employers created 187,000 new jobs in August and monthly employment totals were downgraded by a combined 110,000 in June and July, according to the latest employment report from the U.S. Bureau of Labor Statistics (BLS).
Over the summer, 150,000 jobs were added on average each month, down from a 238,000 average gain in the spring. And current job growth is well below the 400,000 average monthly gain in 2022.
The pace of job creation is starting to more closely resemble 2019, before the pandemic labor market led first to tremendous job losses and then to big monthly job gains during the recovery.
"After red-hot post-pandemic hiring, we are seeing a slow glide into a cooler labor market this Labor Day weekend," said Becky Frankiewicz, president and chief commercial officer of ManpowerGroup. "With pandemic paranoia about hiring lingering, companies are continuing to hold onto their workers, remembering how hard it was to rehire."
The labor market overall is at "an ideal cruising altitude," said Julia Pollak, chief economist at ZipRecruiter. "It's high enough to keep the unemployment rate low while creating more opportunities for workers to come in off the sidelines, but low enough so as not to cause a resurgence of inflation."
"The labor market remains solid," agreed Nick Bunker, head of Economic Research at the Indeed Hiring Lab. "Payroll gains continue to slow down, wage growth is moderating slowly, and labor force participation is trending upward. Monthly payroll gains are still running faster than the neutral pace of 70,000-100,000 needed simply to keep pace with population growth, but are trending toward that threshold."
Bunker added that job creation was never going to keep up with the pace from 2022 and wages weren't going to grow indefinitely at an over 6 percent annual rate. "The U.S. labor market continues to come back to earth from a very high peak," he said.
Richard Wahlquist, CEO of the American Staffing Association, sees the latest employment report as another sign that the Federal Reserve's campaign to raise interest rates should be paused.
Federal Reserve officials watch the BLS report closely to determine whether borrowing costs need to be raised again to slow the economy and keep inflation down.
"Now, more than ever, it's important for the Fed to pause and let the data catch up with what we are seeing on the ground," Wahlquist said. "Further rate hikes will negatively impact jobs and people's lives."
Unemployment Shoots Up
The unemployment rate rose in August to 3.8 percent from 3.5 percent in July, the highest since February 2022. Another, more encompassing unemployment measure that includes discouraged workers as well as those working part-time for economic reasons jumped to 7.1 percent, the highest it's been since May 2022.
Unemployment unexpectedly rose because the pool of available workers expanded noticeably, by 736,000 people, said Andrew Flowers, lead labor economist at Appcast. The labor force participation rate rose to 62.8 percent, the highest since February 2020.
"An expanding labor force is a good thing," Flowers said. "The prime-age labor force participation rate moved up to 83.5 percent and the prime-age employment-to-population ratio went up to 80.9 percent."
Aaron Terrazas, chief economist at Glassdoor, noted that unemployment has been remarkably muted given the sharp increase in interest rates over the past year.
Industry Breakdown
"Health care once again led job growth in August, adding a strong 71,000 jobs," said Geno Cutolo, head of Adecco North America. "Leisure and hospitality also saw gains [40,000 new jobs], albeit at a slower pace due to lower seasonal demand. Our teams are getting ready for peak holiday shopping season, so we can anticipate industries such as retail, supply chain and logistics, customer service, and transportation to begin to rise in coming months as well."
Pollak said that the industries with a headcount shortfall relative to pre-pandemic levels continued their slow recovery. "Leisure and hospitality, nursing homes and childcare centers posted robust gains. Local government education was a weak point, however, despite early and aggressive back-to-school recruiting campaigns across school districts. The decline suggests that our K-12 schools are yet again starting the school year with many unfilled vacancies."
Transportation and warehousing shed 34,000 jobs in August. "The majority of that decline was likely attributable to a major industry bankruptcy in late July," Terrazas said. "The information sector also lost 15,000 jobs, driven by the motion picture and sound recording industry experiencing an ongoing strike. Smoothing past these two one-off factors in the transportation and information sectors would have pushed August payroll gains above 200,000, which is generally considered strong job growth for the U.S. economy."
Wahlquist said that temporary staffing levels decreased again in August, as employers continue to be very cautious about how and when to add staff. "Although levels are down from the historic points seen in 2022, demand for flexible and permanent labor remains above pre-pandemic levels," he said.
Wage Gains Are Moderating
Wage growth is higher than the average rate before the pandemic but is on a downward trajectory. Average hourly earnings increased 0.2 percent for the month and 4.3 percent from a year ago, a possible sign that inflation pressures are easing.
"Wage gains are still robust but are near the high end of a sustainable pace," Bunker said. "There are signs that wages will continue to slow down as quitting has moderated and posted wages continue to decelerate. A wage-price spiral is less and less of a concern moving forward."
Flowers said that the cooling wage gains, along with the slowdown in jobs growth, is on target for the Federal Reserve's desired "soft landing"—slowing economic growth without falling into a recession.