Cooler air permeating the nights as summer comes to an end is a perfect metaphor for an American labor market easing from the historically tight conditions of the past few years.
In August, the U.S. economy added 187,000 jobs and the unemployment rate settled in at 3.8%, according to Labor Department data released on Friday.
The increase in the unemployment rate from 3.5% in July can be attributed to the 736,000 workers who entered the labor force in August, which is what one wants to see as average hourly earnings remain strong and wage increases exceed the inflation rate by annual rate of 1%.
Read more of RSM’s insights on the economy and the middle market.
In addition, the Bureau of Labor Statistics revised down by 110,000 the past two months of job estimates. That revision brings the three-month average of job growth to roughly 150,000 and is another reflection of the overall cooling in the demand for labor.
Slower hiring, an increase in the labor force and cooling wage growth are exactly the policy mix that central bankers at the Federal Reserve want to observe as they approach policy decisions in September and November.
Average hourly earnings increased by 0.2% on the month and by 4.3% from a year ago. Given the pace of quits, or people voluntarily leaving their jobs, the cooling in the wage market should accelerate.
Even with a 3.8% unemployment rate, an insufficient supply of labor continues to be the primary characteristic of the current business cycle.
To stabilize the labor market, the American economy needs to produce only about 65,000 jobs a month. For this reason, even as the economy slows, the unemployment rate will not move much higher.
Policy implications
Both inflation and labor market data suggest that the Federal Reserve can pause in its efforts to restore price stability. In particular, with the recent decline in quits, we think that there is no need to increase the policy rate, which sits at a restrictive 5.25% to 5.5%.
Now, the focus from our perspective is not what the Fed will do at its September policy meeting; rather, it is the decision at the November meeting and if the policy rate proves to be the peak in the current cycle.
We would make the case that as hiring, spending, inflation and overall economic activity slow into the final three months of the year, the Fed will not have a need to increase its policy rate further.
The data
In our estimation, about 174,000 of the 187,000 jobs created in August were clustered in high-wage categories, which reflects a tight supply of skilled workers. Total private employment increased by 179,000 jobs, driven by 143,000 new positions in the private service sector.
There were 36,000 jobs created in the goods-producing sector, 22,000 in construction and 16,000 in manufacturing. Also, 102,000 jobs were created in private education and health, 40,000 in leisure and hospitality, and 10,000 in government. Retail trade contributed 6,000 to the top-line gain. In addition, 4,000 financial jobs and 19,000 jobs in professional business services were created on the month.
Some categories, though, had job losses, including 20,000 in trade and transport, 15,000 in information and 19,000 in temporary hiring.
The takeaway
Hiring remains solid across the economy and many firms still point to finding skilled labor as their primary challenge despite a cooling in the overall pace of job creation. Wages, like the top-line number, are also easing back from cyclical highs. Based on other labor market data, wages will most likely cool further in the coming months. That easing should provide relief on inflation and facilitate a stabilization of overall business costs.
The Federal Reserve should feel comfortable eschewing another rate increase at its meeting this month and keep the federal funds policy rate at a restrictive 5.25% to 5.5%.
