Job growth bounces back some, hourly earnings jump, unemployment dips, but job growth is too slow to absorb the massive influx of immigrants.
By Wolf Richter for WOLF STREET.
Payrolls at employers rose by 142,000 jobs in August, the most since May, and a bounce-back from July, which was revised down to 89,000 new jobs (may have been affected by the bad weather across a big part of Texas due to Hurricane Beryl), and from June, which was revised down to 118,000, according to the Bureau of Labor Statistics today (blue in the chart).
The three-month average — which includes the revisions and irons out the month-to-month squiggles — declined to 116,000 jobs, dragged down by the July report, and at the very low end of the three-month averages in 2018 and 2019 (red).
A month ago, the three-month average for July was 170,000 as reported then, which was decent compared to 2018 and 2019. But that drop of the three-month average from 170,000 a month ago to 116,000 now took it from decent to weak.
The Fed’s rates are high, inflation has dropped, and the labor market could use some juicing up.
Clearly, the growth in new jobs has slowed from the frenetic pace of rehiring in 2021-2023 after the mass-layoffs during the early phases of the pandemic that had then triggered labor shortages.
Job creation has now dropped to the lower end of the range in 2018 and 2019, making it more difficult for the massive waves of immigrants – 6 million in 2022 and 2023, plus those arriving this year, according to the Congressional Budget Office – to find work, which has been putting upward pressure on the unemployment rate.
But layoffs remain very low. It’s not that companies in aggregate are shedding jobs as they would during a recession – but they’ve slowed adding jobs.
The Fed’s policy rates are high and, at 5.25% to 5.5%, well above all inflation rates, and double the annual core PCE price index (2.6%), which the Fed uses for its 2% target. This puts policy rates into fairly restrictive territory, and the labor market has started to show the effects.
So inflation is still above target, and it ticked up in July, which was perhaps just one of the squiggles on the way down, or one of the squiggles that indicated a change in direction. Either way, there is now room to cut. And job creation has now slowed to where cuts would be appropriate in order to not further reduce momentum in the labor market.
If inflation resurges, and refuses to go back down on its own, the Fed can always hike again. Rate cuts are not permanent.
A recession in the US (which are called out by the NBER) generally includes actual declines in payrolls (but they’re still growing), a surge in the unemployment rate (but it remains historically low and dipped in August), a surge in initial unemployment insurance claims (which remain historically low and fell further in recent weeks), and quarter-to-quarter declines in GDP (but in Q2, GDP grew 3.0%, much faster than the 10-year average, picking up steam from the more sluggish growth in Q1).
So a rate cut in September wouldn’t be because there’s a recession, but because the Fed has room to cut, with inflation being half its policy rates; and because the labor market now has trouble growing fast enough, with interest rates this high, to absorb the massive influx of immigrants that are looking for work.
Average hourly earnings jumped by 0.4% (4.9% annualized) in August from July, the biggest increase since January (blue in the chart below).
The three-month average, which includes revisions and irons out some of the month-to-month squiggles, accelerated to 0.31% (3.8% annualized), the biggest increase since March, the second month in a row of increases, and at the very high end of the range in the years before the pandemic (red).
The 12-month rate rose to 3.8%, well above the peaks of the 2017-2019 period.
This still relatively high wage growth is way down from the pace in 2022 and 2023. As Powell said at the press conferences, it likely no longer provides significant fuel for inflation.
The headline unemployment rate (U-3) dipped to 4.2% (from 4.3% in July), which is still historically low, but is up sharply from the period of the labor shortages in 2022.
The unemployment rate now sits smack-dab on the Fed’s 4.2% “longer run” median projection for the unemployment rate, according to the Fed’s last Summary of Economic Projections.
The unemployment rate is also where the massive influx of immigrants over the past two years – estimated at 6 million in 2022 and 2023 by the Congressional Budget Office – shows up: Those that are looking for a job but have not yet found a job count as unemployed. And their influx into the labor force has caused the unemployment rate to rise.
An increase in the unemployment rate due to a surge in the supply of labor is a different dynamic than a rise in the unemployment rate caused by job cuts (reduction in demand for labor), as we would see during a recession:
The number of unemployed people looking for a job dipped to 7.11 million. At the low point during the labor shortages, the number of unemployed had dropped to 5.8 million.
The unemployment rate (above) accounts for the large-scale growth in the labor force over the decades; this metric here of the number of unemployed does not take into account the growth in the labor force.
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