The U.S. economy created slightly fewer jobs than expected in August, reflecting a slowdown in the labor market and also paving the way for the Federal Reserve to cut interest rates later this month.
The Labor Department’s Bureau of Labor Statistics reported Friday that nonfarm payrolls added 142,000 this month, up from 89,000 in July but below the Dow Jones consensus estimate of 161,000.
At the same time, the unemployment rate fell as expected to 4.2%.
The labor force increased by 120,000 from the previous month, lowering the unemployment rate by 0.1 percentage point, while the labor force participation rate remained at 62.7%. An alternative measure that adds discouraged workers and those working part-time for economic reasons rose to 7.9%, the highest level since October 2021.
The household survey, which is used to calculate the unemployment rate and tends to be more volatile than the establishment survey, showed an increase of 168,000 people in employment, but overall part-time employment increased by 527,000, while full-time employment fell by 438,000.
Markets initially had little reaction to the data, with stock futures trading in the negative and government bond yields also falling.
While the August figure was close to expectations, the two previous months had been revised down significantly: The BLS reduced July’s total by 25,000, and June’s figure fell to 118,000, a downward revision of 61,000.
“This isn’t great. It’s not a disaster, but the headline reading is below expectations and it’s the revisions that really concern me,” said Dan North, senior North American economist at Allianz Trade. “This is definitely going in the wrong direction.”
By sector, construction led the way with an increase of 34,000. Other big gains were in health care with an increase of 31,000 and social assistance with an increase of 13,000. Manufacturing was down 24,000 from the previous month.
In terms of wages, the average hourly wage increased by 0.4% from the previous month and 3.8% from the previous year, beating expectations of 0.3% and 3.7% increases, respectively. Working hours increased slightly to 34.3 hours.
The report comes as markets are on edge over the next steps from the Fed, which has kept interest rates on hold since July 2023 after a series of big rate hikes to tame inflation.
Prior to the announcement, the market was pricing in a 100% probability that the Fed would begin cutting rates at its Sept. 17-18 meeting. The only question was how big the cut would be.
After the jobs report was released, futures market prices briefly leaned toward a 0.5 percentage point cut before reverting to 0.25 percentage points, according to CME Group’s FedWatch index.
“For the Fed, the decision will be about which is the bigger risk: a 50% rate cut and renewed inflationary pressures. [basis points] Or even a 25% cut could trigger a recession. [basis points]”Overall, with inflationary pressures subdued, there’s no reason for the Fed not to be cautious and cut rates sooner,” said Seema Shah, chief global strategist at Principal Asset Management.
Recent economic data suggests the labor market is slowing, even as growth continues. Payroll company ADP reported Thursday that private companies added just 99,000 jobs in August, while outplacement firm Challenger, Gray & Christmas reported that layoffs surged in August and hiring hit its slowest pace so far this year since at least 2005.
The BLS reported that private sector employment increased by 118,000 this month, up from 74,000 in July. Government employment increased by 24,000.
Most Fed officials have also signaled they see rates falling. In a key annual speech at the Fed’s annual meetings in Jackson Hole, Wyoming, Chairman Jerome Powell declared that “it’s time” to adjust policy, but he didn’t specify what that meant.
New York Fed President John Williams supported lowering interest rates in a speech on Friday morning.
“With the economy in balance and inflation on track toward 2 percent, it would be appropriate to ease the tightening of our policy stance by lowering the target range for the federal funds rate,” Williams said in a speech at the Council on Foreign Relations in New York.
