The August Employment Report Calls for a Fed Pause in September, But…

In the United States, hiring rebounded in August, and wage growth slowed, presenting a mixed picture of resilience and moderation in the labour market.
Nonfarm payrolls increased by 187,000 after the previous two months were revised downward. The unemployment rate rose to 3.8%, the highest since early last year, reflecting a rebound in labor force participation. The employment figure also includes a combined drop of 54,000 in the entertainment and trucking sectors, primarily due to an entertainment industry strike and the closure of a primary carrier.

The labour market has been the cornerstone of the U.S. economy this year, providing a new momentum that could help the country avoid a recession, at least in the short term. While job openings and wage gains have declined recently, hirings and incomes are still sufficient to support consumption.

That being said, Friday’s report offers fresh signs that hirings haven’t been as strong as previously announced. Gains for June and July were revised downward by 110,000.
The unemployment and wage figures likely justify the Federal Reserve maintaining its interest rates at their highest level in 22 years this month and potentially leaving them there for a while. However, officials have indicated they might still consider another increase later this year, especially if inflation fails to calm down.

Behind the surprise upward numbers in August’s employment report lie weaknesses that suggest the Fed should pause its rate-hiking cycle. Hourly wage growth has significantly slowed, labour market participation has increased, particularly among older workers and working-age women, and previous figures have been revised downward.
The report shows that more people are re-entering the labour market, which could help alleviate wage pressures. The overall participation rate, the share of the population working or actively seeking work, increased for the first time since March to 62.8%, the highest since February 2020.

With a better balance between labour supply and demand, the outsized wage gains during the pandemic have faded. Average hourly earnings increased by 0.2% from July, the smallest rise since early last year, and 4.3% compared to a year earlier.
This mixed report argues for a status quo at the Fed meeting in September. However, the recent statements from Jerome Powell might not satisfy what can be described more as hints than confirmed facts. I remain convinced that the Fed will raise rates by 25 basis points in September to assess the outcomes of its actions over the following six months.

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