Mixed picture for August employment
Relatively healthy jobs report keeps Fed hiking rates.
Nonfarm payrolls were modestly stronger than expected in August, the household survey last month more than doubled to 442,000 jobs from July levels, the participation rate rose in August for the first time in three months to 62.4% and average hourly earnings were steady at 5.2% growth on a year-over-year (y/y) basis for the third consecutive month. As a result of this collective labor-market strength, we expect the Federal Reserve to raise interest rates by an outsized 75 basis points for its third consecutive policy meeting when it meets again later this month.
Steady job gains August nonfarm payrolls were stronger than expected, rising by 315,000, modestly higher than Bloomberg’s estimated consensus gain of 298,000, but well below July’s strong gain of 526,000 jobs. Importantly, June’s employment results were revised down by 105,000 to a gain of 293,000 jobs. While Federated Hermes’ estimate for August payrolls was for a below-consensus gain of only 188,000 jobs, when we include June and July’s combined downward revisions of 107,000 jobs, the reported nominal gain of 315,000 shrinks to an adjusted increase of only 208,000 jobs, roughly in line with our conservative forecast.
Fed three-repeat in September In the wake of Fed Chair Jerome Powell’s hawkish keynote speech last Friday at the Fed’s annual monetary policy symposium at Jackson Hole, Wyo., we expect the Fed to execute another 75-basis-point fed funds rate hike on Sept. 21. To be sure, the August CPI report will also be important, with nominal y/y retail inflation peaking at a 41-year high of 9.1% in June and 8.5% in July, in conjunction with continued elevated 5.2% wage growth. The hope is that the Fed can eventually downshift to perhaps half-point hikes at their November and December policy-setting meetings.
Equity correction should continue The S&P 500 surged by 19% from mid-June through mid-August, and Powell endeavored to burst the equity market’s euphoric bubble with his tough-love speech last week. He explained inflation is elevated and the Fed would continue to hike interest rates until inflation slowed to its 2% target over the next few years. The Fed is prepared to trade higher unemployment and slower GDP growth to achieve its goal, and the risk is that the economy could slip into recession next year. The 2/10 yield curve, for example, is currently inverted by 20 basis points, which suggests that bond investors believe that the risk of recession is growing. As a result, stocks have retraced about half their recent gains over the past three weeks.
ADP, JOLTS, Challenger and claims point to a labor-market inflection point There are several other metrics that point to slowing employment:
- ADP private payroll survey took a two-month break in June and July to revise its methodology. Its August report added only 132,000 jobs, the weakest report since January 2021 and a 79% decline in job creation over the past year. Importantly, wage growth is sizzling, with an 8.3% y/y increase last month for large companies and a 5.4% gain for smaller companies. Over the past year, ADP reports that people who changed jobs experienced a 16.1% pay increase—more than double the 7.6% gain for those who did not jump ship.
- Lagging Job Openings & Labor Turnover Survey (JOLTS) declined 5.2% over the past four months, from a record 11.86 million job openings in March 2022 to 11.2 million in July. There still are 2 job openings for every unemployed worker, and voluntary quits and their rate are at now 4.2 million workers and 2.7%, respectively.
- Challenger job cuts rose 30% in August from a year ago, with technology and autos at the top of the list.
- Initial weekly jobless claims climbed 40% over the past five months from 166,000 claims in mid-March to 232,000 in late August, down from a mid-July peak of 261,000 claims. Historically, when claims back up by more than 50,000, recession soon follows.
Unemployment, labor impairment & participation rates all rise The household survey surged by 442,000 jobs in August, more than double the 179,000 jobs added in July. In sharp contrast, this measure had declined twice from April through June. The number of unemployed people rose by 344,000 in August, versus a sharp decline of 242,000 in July, which had marked the fifth decline in the previous six months. As a result, the unemployment rate (U-3) leapt to 3.7% in August, up from 3.5% in July, which had matched its pre-pandemic, half-century low in February 2020. The labor impairment rate (U-6) also soared to 7% in August, up from its record low (dating back to 1994) of 6.7% in June and July. But the civilian labor force surged by 786,000 workers in August, as savings rates are falling, reversing the decline of 63,000 jobs in July, which had marked its third decline in the previous four months. That drove the participation rate higher to 62.4% in August, up from 62.1% in July, compared to the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery diverges further High-wage-earning workers saw their unemployment rate slip a tick to 1.9% in August, matching its pre-pandemic cycle low. But the unemployment rate for low-skilled workers soared to 6.2% in August from 5.9% in July, well above its 30-year low of 4.3% in February 2022. The personal savings rate fell to a new 13-year low of 5% in July 2022 (down sharply from 26.6% in March 2021). This suggests unskilled workers are returning to the labor market as their savings dwindle.
Sector details scattered The manufacturing sector added a better-than-expected 22,000 jobs in August (consensus estimate at 15,000), but that’s down from July’s upwardly revised gain of 36,000 and 25,000 in June, and is well below 61,000 new hires in April and 58,000 in March. Construction added only 16,000 new jobs in August, versus downwardly revised gains of 24,000 in July (originally reported at 32,000) and 10,000 in June (originally reported as 16,000). That pales by comparison with May’s gain of 35,000 jobs. Mortgage rates doubled to 6% in the first half of this year, slowing the housing market. Back-to-school retail hiring soared to 44,000 in August, up sharply from 29,000 jobs in July and 22,000 in June, and well above declines of 44,000 jobs in May and 23,000 jobs in March.
Temporary hiring, a leading indicator of employment trends, added 12,000 new jobs in August, extending steady gains of 9,000 in July, 7,000 in June, 5,000 in May and a loss of 11,000 jobs in April. Leisure & hospitality plunged to a gain of only 31,000 jobs in August, down by two-thirds from a gain of 95,000 new jobs in July. New hires in June, May and April averaged 57,000, but that’s well below robust hiring of 124,000 in February, 138,000 in January, 186,000 in December and 191,000 in November. This slowdown in leisure & hospitality hiring has negatively impacted low-wage workers, whose unemployment rate has surged by nearly 2% over the past six months.