The U.S. August report was a solid if unspectacular one that reflected the type of non-inflationary job growth that will give Federal Reserve policymakers confidence as they embark on their long-awaited campaign to reduce rates.
Once one adjusts for the benchmark revision, employment has been remarkably stable for the past year as employment of those in their prime working years of 25 to 54 has increased.
This is what full employment looks like, and that is a good thing for the domestic economy and growth.
The 142,000-job increase in total employment in August and the decline in the unemployment rate to 4.2% (4.221% vs. 4.253% in July) compared with 4.3% previously reflects a cooling in labor market demand.
In our year-ahead forecast, we expected hiring in the second half of the year to cool to a pace near 120,000—the three-month average through August stands at 116,000—with the knowledge that the economy needs to generate only 100,000 jobs per month to keep employment stable.
Read more of RSM’s insights on the economy and the middle market.
The Federal Reserve should and will reduce its restrictive policy rate at its meeting on Sept. 18. While we strongly urged the Fed to cut the policy rate at its July meeting, that did not occur.
The central bank should start on a what we think will be a string of 25 basis-point cuts until the policy rate stands at or near 3.25%, which is our current estimate of the neutral rate.
In addition, the Fed should make it clear at its next meeting that it intends to get to neutral in a gradual and prudent manner to support overall economic activity.
The data
Total private employment increased by 118,000 in August with private education and health adding 47,000 jobs, leisure and hospitality adding 46,000, government hiring 24,000 new workers, financial jobs increasing by 11,0000 and trade and transport rising by 2,000.
Higher-paying jobs in the goods-producing sector increased by 10,000, construction jobs jumped by 34,000 while the manufacturing sector saw a decline of 24,000 positions. Retail trade employment dropped by 11,000 and temporary help declined by 3,000.
The household survey, which is used to estimate the unemployment rate, increased by 168,000 jobs in August, while average hourly earnings advanced by 0.4% on the month and was up by 3.8% from a year ago.
Total private hours worked increased to 34.3 on the month and manufacturing hours increased to 40. The total number of people working was 158,779,000, up from 158,637,000 previously.
The prime-aged employment rate stood at 83.9%, with 89.5% of men in that cohort employed and 78.4% of women employed. All were at or near a multidecade high.
The takeaway
Hiring is cooling and we expect that will define the second half of the year as firms manage their mix of capital and labor to meet demand. The weak July report was more a result of seasonality in the data and does not point to a sudden turning over of the American labor market.
This report is consistent with the Federal Reserve’s reducing its policy rate by 25 basis points at its upcoming policy meeting, and we anticipate that as rates come down firms will find their weighted average cost of capital easing. That decline should unleash pent-up demand for investment in critical software, equipment, intellectual property and platform services.
