August Job Gains Likely to Trigger Interest Rate Cut

U.S. employers added 142,000 jobs in August, a solid number but still below expectations and yet another signal of a continued slowdown in the labor market, according to the latest employment report from the U.S. Bureau of Labor Statistics, released today.

In a further sign of labor market weakness, the job growth estimates for June and July were revised down by a combined 86,000 jobs. Hiring has been decelerating all year, and August’s employment report is expected to be a big factor as the Federal Reserve decides whether to cut interest rates—and by how much—to avoid a recession.

“The good news is that the labor market isn’t weakening as quickly as last month’s shaky report would have you believe,” said Nick Bunker, economic research director for North America at the Indeed Hiring Lab. “The bad news is that the labor market’s strength keeps fading. Large downward revisions to data from earlier in the summer put the three-month average of job gains at 116,000 per month, lower than the pace needed to keep up with current labor force growth and below 2019’s average monthly pace of 166,000 job gains.”

In conjunction with other recent evidence, today’s report reinforces the growing narrative that the labor market has cooled significantly, said Justin Ladner, senior labor economist at SHRM. “To be clear, the U.S. labor market remains tight by historic standards, and job growth is still relatively strong overall,” he said. “However, monthly employment gains have fallen somewhat and are becoming more concentrated in specific sectors. Furthermore, wage growth has continued to moderate as expected, and the super-heated conditions of recent years have given way to conditions that much more closely resemble those that existed immediately before the pandemic.”

Sam Kuhn, an economist at Appcast, pointed out that for the third month in a row, the labor market has been underwhelming as businesses have rapidly scaled back their willingness to hire.

But “while hiring activity has cooled, we’ve yet to see widescale layoffs as the unemployment rate did not change this month after steadily rising the past year,” he said. “This jobs report is neither too weak to indicate further deterioration nor too strong to give the Fed the comfort to only cut interest rates by 25 basis points later this month.”

Economists expect the weakening jobs picture to push the Federal Reserve into lowering interest rates when it meets Sept. 17-18. The main question is how aggressive the action will be. Inflation could be rekindled if the cut is too big, or the economy could tip into recession if the cut is too small.

“A lifeline from the Federal Reserve in the form of an interest rate cut is likely imminent, but there are questions if it’s coming too late or if it will be strong enough to pull the market back,” Bunker said. “This labor market expansion is still salvageable, and its future depends in large part on policymakers’ actions. Help seems like it’s on the way, but we’ll have to see if it will be enough and if it will come in time.”

Noah Yosif, chief economist at the American Staffing Association, said the August jobs report makes a strong case for a larger rate cut in September than previous projections.

“The economy and the labor market are going to be facing some hurdles in the race towards a soft landing in the coming months,” he said. “The speed and size of tightening, in conjunction with variable lags in monetary policy, could foster additional deterioration in the short term before labor costs retreat. On the other hand, a steady labor force participation rate—while still below pre-COVID levels—suggests that employers are committed to keeping their workers, waiting for a meaningful reduction in interest rates before expanding headcount.”

Even though employment growth overall is slowing down, there are still increases in certain industries, said Geno Cutolo, head of Adecco North America. “With the holiday peak season around the corner, we can expect employers to focus on preparing for the ‘September Surge’ and seasonal hiring, which should help the labor market regain momentum for the remainder of 2024,” he said.

Industry Breakdown

The construction sector led the month’s growth with 34,000 new jobs, higher than the average monthly gain of 19,000 over the prior 12 months. “That is surprisingly strong, considering the high interest rates,” Kuhn said.

Health care employers added 31,000 jobs in August, about half the average monthly gain of 60,000 over the prior 12 months. “There was noticeable weakness in the health care sector, which saw the slowest pace of hiring since March 2022, while a decline in manufacturing employment [down 24,000 jobs] can likely be written off to seasonal plant shutdowns,” said Aaron Terrazas, chief economist at Glassdoor.

“Manufacturing, which has held up in the past two years of elevated pressure, seems to be cracking,” Kuhn said. “White-collar jobs were nearly flat last month, with professional and business services adding just 8,000 and information losing 7,000 jobs.”

The report shows a lingering tech slump, said Julia Pollak, chief economist at ZipRecruiter. “After initially posting job gains in the back half of the year, the tech sector has gone back to posting losses,” she said. “The sector has now lost 4,000 jobs over the past 12 months, with the tech turnaround appearing to be in jeopardy.”

Pollak added that employment in child care services has grown by a mere 10,600 jobs over the past 12 months and is clearly not enough to meet demand.

The retail slowdown continues as well, she said. “Retail has lost over 56,000 jobs over the past 12 months, a testament to the fact that consumer loan growth is slowing, consumers are becoming more price-sensitive, and retailers are pulling back due to uncertainty about the business outlook.”

Becky Frankiewicz, chief commercial officer and president of ManpowerGroup North America, said her company's data showed a pickup in job postings in August following a slower July. “We’re not seeing that translate into the Labor Department data just yet, but we can expect to see this seasonality in weeks ahead as employers shore up their talent for the fall,” she said. “We’re seeing gains in government, business, finance, and in health care.”

Unemployment Ticks Down

The unemployment rate in August fell slightly to 4.2%, as expected. However, the “real” unemployment rate that includes discouraged workers and those holding part-time jobs for economic reasons edged up to 7.9%, its highest reading since October 2021.

“A dip in unemployment is something to celebrate, but don’t get overly excited about this decline,” Bunker said. “The pullback from last month’s spike likely signals that the unemployment rate is back on its former trajectory—a slow but steady increase. Rising unemployment continues to be driven by more people entering the labor force and having a harder time quickly finding a job. That’s a good sign the labor market isn’t on the cusp of imminent collapse, but it does mean its strength is steadily eroding.”

Terrazas noted that the number of unemployed workers following the loss of temporary jobs shot up over the summer and is now in line with where it was during the height of the pandemic. “It’s a reminder of the cyclical precarity of the booming gig economy,” he said.

Wages Follow Moderation Trend

Average hourly earnings increased by 0.4% for the month and 3.8% from a year ago, both slightly higher than projected estimates.

“Average hourly earnings had a slight uptick [in August], but the underlying trend is still clear: Overall quitting and attrition has declined significantly since 2022, which is putting downward pressure on wage and salary costs,” Kuhn said.

Wage inflation has been on a steady downward trajectory for two years, and today’s report does not suggest a reversal of that trend, Ladner said.