August Non-Farm Data: Mixed Signals for Fed's Rate Decision
2min read The non-farm payroll data for August can be described as both expected and surprising: Expected because the report essentially confirmed the trend shown by yesterday's ADP employment data; but surprising because, in terms of specific numbers, the non-farm figure fell below market expectations once again.
Data shows that in the last month, U.S. non-farm employment increased by 142,000 people, also below the market's previous expectation of 161,000. From an industry perspective, the construction industry led the way by adding 34,000 jobs in the month, while the healthcare and social assistance sectors also recorded increases in the number of positions. However, the U.S. manufacturing industry lost 24,000 job opportunities in the month.
In addition to employment numbers, the U.S. Bureau of Labor Statistics also released data on the unemployment rate and average hourly earnings: In August, the U.S. unemployment rate decreased by 0.1 percentage points month-on-month to 4.3%, marking the first decline in this indicator since March. At the same time, American wages also accelerated growth in the previous month—August's year-over-year growth in average hourly earnings reached 3.8%, with a month-on-month increase of about 0.4%, both exceeding market expectations and the previous month's figures. The labor force participation rate remained unchanged from July at 62.7%.
It is worth noting that along with the August report, the July employment data was also significantly revised from 114,000 to 89,000, and the June data was revised down by 61,000. Additionally, the report mentioned that the proportion of people who gave up looking for work out of frustration or are working part-time for economic reasons rose to 7.9% in August, which is the highest level of this statistical indicator since October 2021.
Overall, looking at the August non-farm report, the lower-than-expected employment numbers further prove that the first half of the year's booming hiring spree in the U.S. has indeed reached a waning moment. However, compared to the unsettling signs in July, the changes in the unemployment rate and average hourly earnings in August also indicate that under the pressure of high interest rates, U.S. companies still have considerable resilience, and the market does not need to worry excessively.
The unemployment rate remained relatively low at 4.2%. It's not showing a breakdown in the labor market. Also, the hourly rate was not cut back, which was a concern for many, said Matt Rowe, Head of Cross-Asset Strategy and Portfolio Management at Nomura Capital Management: Today's numbers don't look like a recession is imminent. It just looks like things are slowing down a bit, not something catastrophic.
However, this report has made the Fed's next actions interesting - before the data was released, the market was almost certain that the Fed would start cutting rates at the meeting on September 17-18, and the only variable was the specific magnitude at that time. With the latest non-farm data released, the expectation of 25 basis points is becoming the mainstream view - now the probability of the Fed cutting rates by 50 basis points this month on Fed Watch has been lowered to 39%.
For the Fed, the decision comes down to deciding which is the bigger risk, said Seema Shah, Chief Global Strategist at Principal Asset Management: Reigniting inflation pressures if they cut by 50 [basis points] or threatening recession if they only cut by 25 [basis points].
Earlier today, in his speech, John Williams, President of the Federal Reserve Bank of New York, also mentioned that given the progress in reducing inflation and cooling the labor market, he believes it is now an appropriate time to lower interest rates.
However, like his other Fed colleagues, Williams refused to give clear numerical guidance on rate cuts. In the view of Nick Timiraos, known as the Fed's mouthpiece, this non-farm employment report did not provide a clear clue, because the overall non-farm data is not bad enough to make the base expectation a 50 basis point rate cut, but considering the revised data, it is not convincing enough to completely dispel speculation about a larger rate cut.