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Employment Growth Downshifts In August

Scott Anderson
Chief Economist
Bank of the West

Employment growth downshifted to 315k jobs in August from 526k in July - only a touch slower than our forecast of 325k. There was also a net downward revision in the June and July job numbers of 107k. In short, the cool down in the U.S. labor market appears to be on a slow glide trajectory rather than a collapse that would indicate an imminent recession. It is important to emphasize that even with this slowdown monthly job creation is still way better than pre-pandemic trends and far stronger than what the Fed would like to see to help bring down our high inflation rate. Over the past three months the U.S. economy has created a net 378k jobs a month or 1.1 million net new jobs total. In 2019, for example, the U.S. economy created on average just 164k jobs per month or 1.97 million jobs during the entire year.

More Than A Full Jobs Recovery

Bottom-line, the FOMC will likely continue to hike the Fed funds target rate at all of the last three meetings of the year. At the one coming up in September, we continue to forecast an outsized 50 basis point rate hike from the Fed. In the aftermath of today's jobs report, the Fed funds futures market has decreased the probability of a 75 basis point hike at the next FOMC meeting to 55% from around a 75% probability of such a large move prior to the Employment Report release.

Expect Another 50 Basis Point Fed Hike This Month

One of the biggest surprises from the August jobs report was the big increase in the U.S. unemployment rate. The U.S. unemployment rate increased two tenths of a percentage point to 3.7% in August from 3.5% in July. This is the first increase in the U.S. unemployment rate since January. Economists had been expecting the unemployment rate to hold steady at 3.5%. However, the unexpected unemployment rate increase had everything to do with a sharp increase in the labor force participation rate last month and isn't a sign of labor market weakness. Employment in the Bureau of Labor Statistics Household Survey, on which the unemployment rate is calculated, actually increased by a robust 442k jobs last month at the same time the U.S. labor force expanded by 786k. This big jump in the labor force was enough to push the labor force participation rate up to 62.4% from 62.1% in July. People classified as Not in the Labor Force plunged by 613k in August as high level of inflation and more than 11 million open positions appear to be pulling more folks back into the labor market actively seeking employment.

Unemployment Rate Ticks Higher As Job Seekers Return

Looking at employment growth last month by sector, the cool down in hiring mostly occurred in the private service providing sectors. Private Service job growth slowed to 263k from 411k jobs in July, a drop of 148k jobs. There was noticeable slowing job creation in education and health care, leisure and hospitality, and information last month. Government employment growth also slowed to 7k jobs from 49k in July. In comparison, goods production employment held up well, construction added another 16k jobs and manufacturers added 22k. Both sectors added somewhat less jobs than in July, but both were on par with the number of jobs added in June. No major sector is yet showing net jobs loss outside of the Federal government that lost a net 2k jobs.

Modest Private Services Employment Pull-Back

On the income side, average hourly earnings slowed to 0.3% in August from 0.5% in July, but the year-on-year growth rate and 3 month average growth rate were unchanged at a robust 5.2% and 4.9% respectively. While hours worked slipped by a tenth to 34.5 hours from 34.6.

Average Hourly Earnings Growth Remains Robust

Putting today's August Employment Report into perspective, this was another solid jobs report that reveals a labor market continuing to perform above and beyond its long-term sustainable trend. This is welcome news for labor, but will not get a kind reception at the Fed. The Fed clearly has more work to do to cool aggregate demand enough put U.S. inflation on a sustainable path back toward its two percent target. We are starting to see tentative steps in that direction, but not enough for the Fed to hold their fire on further rate hikes at upcoming FOMC meetings.

To learn more, check out this week's U.S. Outlook Report.

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