Sluggish US jobs report clears way for Federal Reserve to cut interest rates
Employers added a modest 142,000 jobs, up from a scant 89,000 in July, the Labor Department said Friday. The unemployment rate ticked down to 4.2% from 4.3% in July, which had been the highest level in nearly three years. Hiring in June and July, though, was revised sharply down by a combined 86,000. July's job gain was the smallest since the pandemic.
“The labor market is weakening,” said Eugenio Aleman, chief economist at Raymond James Financial. “It is not falling apart, but it is weakening.”
The cooling jobs figures underscore why the Federal Reserve is set to cut its key interest rate when it next meets September 17-18, with inflation falling steadily back to its target of 2%. Friday’s mixed jobs report raises the question of how large a rate cut the Fed will announce. It could decide to reduce its benchmark rate by a typical quarter-point or by a larger-than-usual half-point. In the coming months, the policymakers will also decide how much and how fast to cut rates at their subsequent meetings.
Christopher Waller, an influential Fed policymaker, suggested in a speech Friday that the central bank is leaning toward a quarter-point reduction this month. But he left the door open for larger rate cuts, if necessary, later this year.
“I do not expect this first cut to be the last," Waller said in a speech at the University of Notre Dame. "With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate.”
“I am open-minded," he added, “about the size and pace of cuts, which will be based on what the data tell us about the evolution of the economy.”
Collectively, Friday’s figures depict a job market slowing under the pressure of high interest rates but still growing. Many businesses appear to be holding off on adding jobs, in part because of uncertainty about the outcome of the presidential election and about how fast the Fed will reduce its benchmark rate in the coming months.
Daniel Zhao, lead economist at the career website Glassdoor, said some of the details in the August jobs report indicate that businesses' demand for workers is slowing. The number of Americans who are working part time but would prefer full-time work rose, extending a year-long trend.
“When you look under the hood, you’re seeing numbers that confirm that the job market is on that cooling trajectory," Zhao said.
America's labor market is now in an unusual place: Jobholders are mostly secure, with layoffs low, historically speaking. Yet with the pace of hiring having weakened, landing a job has become harder.
In the past three months, hiring has averaged only 116,000 a month, down sharply from an average of 211,000 a year ago. And August's job gains were concentrated in just a few industries, with health care adding 44,000 jobs, restaurants, hotels and entertainment companies gaining 46,000, and construction 34,000. Steady hiring by restaurants and hotels could reflect ongoing gains in consumer spending, which rose last month even after adjusting for inflation.
In a major speech last month, Chair Jerome Powell suggested that the Fed’s policymakers have all but tamed inflation through high interest rates and don’t want to see the job market weaken further. The central bank is trying to achieve a “soft landing,” in which it succeeds in driving inflation down from a 9.1% peak in 2022 to its target level without causing a recession. A lower Fed benchmark rate will lead eventually to lower borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.
For now, companies are posting fewer job openings and adding fewer workers, while Americans are far less likely to quit their jobs now than they were soon after the economy rebounded from the pandemic. In a strong job market, workers are more likely to quit, usually for higher-paying opportunities. With quits declining, it means fewer jobs are opening up for people out of work.
Becky Frankiewicz, North American president of the staffing firm ManpowerGroup, said that uncertainty around the presidential election and the Fed’s next moves are causing many companies to hold back on new investments and hiring.
“There’s a whole world waiting to see what happens with our election,” she said. “We have this great waiting game. No one wants to make big moves yet.”
Still, Frankiewicz said the job market appears to be stable for now.
“The bottom isn’t falling out, and we’re not seeing a rocket ship,” she said. “It’s stability.”
A slower pace of hiring is often a precursor to layoffs — one reason why the Fed’s policymakers are now more focused on sustaining the health of the job market than on continuing to fight inflation.
Recent economic data has been mixed, elevating the importance of the jobs report, which is among the more comprehensive economic snapshots of the government issues. The Labor Department surveys roughly 119,000 businesses and government agencies and 60,000 households each month to compile the employment data.
The Fed’s Beige Book, a collection of anecdotes from the 12 regional Fed banks, reported that many employers appeared to have become pickier about whom they hired in July and August. And a survey by the Conference Board in August found that the proportion of Americans who think jobs are hard to find has been rising, a trend that has often correlated with a higher unemployment rate.
At the same time, consumer spending, the principal driver of economic growth in the United States, rose at a healthy pace in July. And the economy grew at a solid 3% annual pace in the April-June quarter.