In a surprising turn of events, the Labor Department reported on Friday that the US unemployment rate rose to 3.8% in August, indicating a cooling US economy. This increase in joblessness came as a shock to economists, who had anticipated the US Bureau of Labor Statistics to report a 3.5% unemployment rate, consistent with July's figures. Despite this, US employers managed to add 187,000 jobs last month, surpassing expectations of 170,000 new jobs. The higher job growth numbers were attributed in part to greater participation in the labor force.
It is worth noting that this is the third consecutive month in which less than 200,000 jobs were added, following downward revisions to previous US jobs data. The stock market reacted positively to the news, with premarket activity showing a spike, as traders interpreted the data as a sign of a "soft landing" for the US economy, alleviating concerns of a possible recession. Additionally, the likelihood of the Federal Reserve increasing interest rates at its next policy meeting decreased.
Becky Frankiewicz, chief commercial officer at employment firm ManpowerGroup, stated, "We are beginning to see this slow glide into a cooler labor market. Make no mistake: Demand is cooling off. But it's not a freefall." This sentiment is supported by the fact that wages saw a 0.2% increase in August compared to the previous month, and a 4.3% increase compared to the previous year, albeit slower than last year's growth rate. These figures still outpace their pre-pandemic pace.
Labor Department data also revealed that manufacturing payrolls increased by 16,000 compared to the previous month. While job growth showed signs of losing momentum, it did not plummet, which is seen as a positive outcome by the Federal Reserve. The central bank has been attempting to control inflation through a series of interest rate hikes, with hopes of achieving a rare "soft landing" that would slow hiring and growth enough to curb price increases without pushing the economy into a recession. While economists have been skeptical about the Fed's ability to achieve this, optimism is growing.
Inflation has been gradually decreasing since reaching its peak of 9.1% in June 2022, with year-over-year inflation dropping to 3.2% in July. Despite the slower economic growth compared to the post-pandemic boom, the US economy has managed to withstand the pressure of rising borrowing costs. From April to June, the gross domestic product rose at a respectable annual rate of 2.1%, while consumer spending and business investments continued to grow.
The Federal Reserve hopes to see a deceleration in hiring to prevent wage inflation and feed into overall inflation. So far, the job market has cooled without significant layoffs, as evident from the Labor Department's report stating that the number of Americans applying for unemployment benefits decreased for the third consecutive week. Rather than resorting to job cuts, companies are reducing job openings, with July seeing the fewest number of openings since March 2021 at 8.8 million.
Furthermore, American workers are becoming less inclined to leave their jobs in search of better opportunities, resulting in a lower pace of quits. This, in turn, eases the pressure on companies to raise wages to retain existing employees or attract new ones. Average hourly earnings are also growing at a slower pace compared to the previous year. While this is a positive development for controlling inflation, annual average pay increases need to slow down to around 3.5% to align with the Federal Reserve's 2% inflation target, according to Nancy Vanden Houten, lead US economist at Oxford Economics.
As a result, economists and financial market analysts increasingly believe that the Federal Reserve may be finished with raising interest rates. A survey conducted by the CME Group revealed that nearly nine out of ten analysts expect the Fed to leave rates unchanged at its upcoming meeting on September 19-20. Overall, while the US economy shows signs of cooling, it is still maintaining a steady course, providing hope for a controlled economic slowdown rather than a recession.
