Bad news is good news
Softer job growth could prevent the Fed from hiking again.
Bottom Line
As we head into Labor Day weekend, the labor market might finally be cooperating with the Federal Reserve. The government reported today that U.S. nonfarm payrolls increased by 187,000 jobs in August yet revised June and July gains substantially lower by a combined 110,000 jobs. At 179,000 and 59,000, respectively, nominal private payrolls told a similar story. Adjusting the headline gain for the downward revisions, August added a net of only 77,000 jobs. That’s less than half what consensus and we at Federated Hermes expected (170,000 and 178,000, respectively).
Further, the August ADP private payroll survey was the weakest in five months and more than half of July’s level; Challenger layoffs more than tripled sequentially in August; and the JOLTS report continued to deteriorate, with job openings in July 27% lower than last year’s peak levels. All of these might seem negative, but in the context of the still healthy U.S. labor market the Fed is trying to cool with rate hikes, they are welcome developments.
Surging unemployment a longer-term positive Household employment added a relatively solid 222,000 jobs in August, compared with gains of 268,000 in July and 273,000 in June and a loss of 310,000 jobs in May. The number of unemployed people soared for the first time since May, rising by 514,00 workers in August, compared with declines of 116,000 workers in July and 140,000 in June. The unemployment rate (U-3) soared to an 18-month high of 3.8% in August from 3.5% in July, and the labor impairment rate (U-6) jumped to a 15-month high of 7.1% from 6.7%. Why? Likely driven in part by a decline in personal savings from $2.3 trillion in September 2021 to $270 billion in July 2023, the labor force expanded by 736,000 workers last month. That boosted the important participation rate to 62.8%, finally breaking out from its 62.6% level of the past five months (and the highest since 63.3% in February 2020). Because 70% could not find work in August, the number of unemployed people rose by 514,000, which drove the unemployment rates sharply higher. Again, while it certainly is bad news when these rates are excessively elevated, the rise here suggests businesses are right-sizing their workforces based on economic conditions. The Fed’s own forecast from its June Summary of Economic Projections is that the unemployment rate will rise to 4.1% by year-end 2023 and to 4.5% by year-end 2024. So unemployment is moving in the right direction.
Soft or hard landing? We still don’t know. The above data suggests we could still avoid a recession. But with another dip in August, the temporary help category lost jobs for the seventh consecutive month, a negative trend that has presaged the last four recessions in the U.S. economy.
What’s the Fed’s take? At its annual monetary policy symposium in Jackson Hole, Wyo., last week, Fed Chair Jerome Powell said the central bank could hike again if inflation and the labor market remained strong. But the collective weight of this week’s soft jobs data suggest we may have already seen the last hike this cycle. Another jobs report and month of inflation data should clarify the picture.
Other important labor-market indicators are weakening:
- ADP private payroll survey It reported that private employers added the fewest jobs in five months in August with a below-consensus 177,000 (versus 195,000). That’s less than half the upwardly revised 371,000 jobs posted in July. Leisure & hospitality hiring added only 30,000 jobs in August, its worst showing since March 2022. Also, “job stayers” experienced their slowest wage growth since October 2021, up by 5.9% year-over-year (y/y) in August (down from 6.2% in July) and by 9.5% y/y last month (versus 10.2% in July) for those who changed jobs.
- Initial weekly jobless claims This high-frequency leading employment indicator has remained relatively solid, falling by 14% over the past two months to 228,000 claims for the week ended August 26. But August’s survey week rose 5% from July to 240,000 claims.
- Challenger job cuts The recent bankruptcy of Yellow Corp. sparked a surge of more than 32,000 warehousing layoffs, which accounted for 43% of the 75,000 total layoffs in August. That’s more than triple July’s total of nearly 24,000.
- Job Openings & Labor Turnover Survey (JOLTS) This lagging report has fallen six of the past seven months to a weaker-than-expected 8.83 million job openings in July (consensus at 9.5 million), its lowest level since March 2021. June was revised sharply lower from 9.58 million job openings to 9.17 million, and July 2023 is down 27% from a record 12 million job openings in March 2022. There are now 1.5 job openings for every unemployed worker in the U.S. (the lowest ratio since September 2021), down from a peak of 2.0 in March 2022. With 3.55 million voluntary quitters in July, the quits rate fell to a new cycle low of 2.3%, the lowest level since the start of 2021. This metric peaked at 3.0% in April 2022.
Wage inflation eases and hours-worked rises Average hourly earnings halved to a softer-than-expected gain of 0.2% month-over-month (m/m) in August (a tick below consensus) and an in-line 4.3% y/y increase, down from gains of 0.4% and 4.4%, respectively. Average weekly hours-worked climbed a tick to 34.4 in August, though that’s down from 34.5 in February. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is critical, as employers tend to cut hours before they consider cutting staff.
K-shaped recovery steady The unemployment rate for high wage-earning workers rose to 2.2% in August from 2.0% in July and September 2022’s cycle low of 1.8%. The rate for low wage-earning workers rose to 5.4% last month from 5.2% in July, compared with its 30-year low of 4.3% in February 2022.
Sector details soft:
- Temporary help has lost jobs in each of the past seven months, dropping 19,000 in August, compared with 24,000 jobs in July and 36,000 in June. The last four recessions in the U.S. have faced similar negative trends.
- Government hiring rose by 8,000 jobs in August (paced by 10,000 federal hires), compared with 2,000 in July and 19,000 in June.
- The manufacturing sector gained a stronger-than-expected 16,000 jobs in August (consensus was at zero), versus a loss of 4,000 in July and a gain of 4,000 in June. The ISM manufacturing index has been in contraction territory under 50 in each of the past 10 months at 47.6 in August.
- Construction remains robust, adding 22,000 jobs in August, on top of 16,000 jobs in July, 29,000 in June and 25,000 in May. Although mortgage rates more than doubled from 3% to a 22-year high of 7.6% over the past two years, there is still enormous pent-up demand for shelter.
- Retail added a tepid 6,000 jobs in August, compared with 13,000 in July after losing 23,000 workers in June. The important spring “Mapril” season was soft, with retail sales rising by a tepid 1.7% y/y, and Back-to-School sales have also started soft with a gain of only 2.4% y/y.
- Leisure & hospitality added 40,000 jobs in August, which was its strongest month since March, compared with 32,000 jobs in July, 26,000 in June and 28,000 in May.