Jobs Review- The case for 50 bps just got a lot stronger
The August jobs report revealed a net increase of 142,000 in nonfarm payroll employment, falling short of expectations and continuing the trend of slowing job growth seen in recent months. While this figure was in line with the recent monthly average, it was a significant drop from the average gain of 202,000 over the past 12 months, indicating a noticeable deceleration in labor market momentum. Job gains were concentrated in sectors like construction and healthcare, with construction adding 34,000 jobs—well above its 12-month average—while healthcare saw a modest 31,000 gain, about half its usual pace. Manufacturing, on the other hand, saw a decline of 24,000 jobs, reflecting a broader slowdown in durable goods industries.
Average hourly earnings increased by 0.4%, or 14 cents, reaching $35.21, bringing the year-over-year wage growth to 3.8%. This uptick in wages was slightly higher than expected and could add some inflationary pressure, but overall wage growth has been moderating compared to earlier in the year. Of note, Fed President John Williams spoke shortly after and stated that he did not believe wages were pressuring inflation. This could help offset some of the concern around inflation handcuffing the Fed rate cut cycle.
For private-sector production and nonsupervisory employees, average hourly earnings rose by 11 cents to $30.27. The modest increase in wages, combined with the slower pace of hiring, reflects a labor market that is still showing signs of tightness, even as the broader economy slows. The average workweek also edged up slightly by 0.1 hour to 34.3 hours, a small but notable increase that indicates some stability in labor demand.
The unemployment rate remained stable at 4.2%, in line with expectations, but the downward revisions to previous months' job gains are raising concerns. The June and July figures were revised down by a combined 86,000 jobs, with June's payrolls being particularly affected by a 61,000-job downward revision. These revisions suggest that the labor market has been weaker than previously reported, and they add to the evidence that the economic recovery may be losing steam as high interest rates and economic uncertainty weigh on hiring decisions.
Market reactions to this report are likely to be mixed, with the data reinforcing the narrative of a cooling labor market but without suggesting an outright collapse. The weaker-than-expected job growth, combined with upward wage pressure, puts the Federal Reserve in a difficult position as it prepares for its upcoming policy meeting. The report may tip the balance in favor of a 50 basis point cut, as it provides evidence of a slowdown without signaling an immediate need for aggressive monetary easing. However, if wage growth continues to show signs of heating up, the Fed may need to weigh inflation concerns more heavily in its decision-making process.
CME Fed Fund Futures moved from a 42% chance of a 50 bps move to 57% following the report.
The disappointing payroll number and downward revisions are also contributing to market jitters, as investors reassess their expectations for the economy and monetary policy. Equity futures were already under pressure before the release, and the weaker-than-expected jobs data could exacerbate selling, particularly in sectors sensitive to economic growth such as industrials and consumer discretionary. On the other hand, sectors like healthcare, which saw solid job growth in August, may find some support as investors seek defensive positions.
Overall, the August jobs report underscores the fragility of the labor market and adds further complexity to the Federal Reserve's decision on interest rates. With wage growth still present but moderating, and job gains weakening, the Fed is likely to proceed cautiously, opting for a smaller rate cut to avoid stoking inflation while attempting to provide enough support to prevent a deeper economic downturn.