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The Fed Must Be Thrilled With This Jobs Report

Author: Andrew Flowers
02 Sep 22

Could the Fed have dreamed of a better jobs report? Solid job gains. Wage growth below expectations. Labor supply rebounded strongly.

Wage growth was below forecasts, easing fears of a wage-price spiral. The U.S. economy added 315,000 jobs in August, according to the latest BLS jobs report. Meanwhile, the unemployment rate increased to 3.7% from 3.5% – but for good reasons, as the labor force participation rate jumped strongly. Overall, businesses are hiring, job seekers are active, and earnings are not spiraling upward. That should reassure the Fed in its attempt to get inflation under control.

Fears of a wage-price spiral are easing 

Wage growth is moderating – a welcomed sign for the Fed. The top economic concern is inflation. The Fed wants to cool the labor market and, in particular, wage growth to get inflation under control but not induce a recession in the process. Today’s report showed growth in average hourly earnings slowed to 4.4% (annualized rate). The three-month annualized change for wage growth also slowed, to 5.4%. Granted, these are nominal gains – not adjusted for inflation – and consumer price inflation is still largely outpacing wage gains but it’s a good sign for the Fed’s goal of a “soft landing.”

Job seekers are returning to look for work

August had a huge surge in the civilian labor force (up 786,000). While the unemployment rate rose from 3.5% to 3.7%, this is largely because the denominator (the labor force) grew so fast. The prime-age cohort of 25- to 54-year old job seekers saw their labor force participation rate shoot up to 82.8%, closing in on the pre-pandemic level. This is a reversal of recent months’ fears that labor supply growth was stagnating.

Yes, the most-cited unemployment rate (U3) rose from 3.5% to 3.7%, but this is still a very low level historically. A more comprehensive measure of unemployment (U6) ticked up three-tenths to 7.0%. Again, this is happening not because jobs were lost but because the labor force (the denominator) grew so fast.

Once again, every major private industry gained jobs in August

The US economy keeps adding jobs at a steady clip. Nonfarm payrolls rose 315,000 in August, slightly above forecasters’ expectations. Every major industry saw job gains, except motor vehicles and parts. The three-month moving average of job gains is nearly 400,000 – nowhere near a recession trend.

The Fed may be reassured by the slow pace of real estate jobs gains; their soft-landing scenario is playing out well in this sector as rising interest rates moderate employment gains. Retail continues to add jobs at a steady pace, even as inventories grow and sales moderate. Retailers added 44,000 jobs in August ahead of pre-holiday surges in employment demand. 

Job gains show continued shift from goods to services

Services-providing employment has had very solid gains in recent months and that continued in August, with a 270,000 job increase. Now the economy has recovered all the service sector jobs it lost in the COVID recession. Meanwhile, goods-producing employment is slowing, down to 45,000 last month. In other words, the continued shift from goods to services consumption may be reflected in these job trends.

What does this mean for recruiters? 

We’re not in a recession, at least according to the labor market. That may conflict with other economic indicators (like GDP), but all eyes are on inflation and last month’s CPI report showed that peak price increases may be behind us. As the labor market remains tight, recruiters face challenges finding workers who are in strong demand. Moderating wage growth is a favorable sign that the Fed’s goal of lowering inflation without triggering a recession is still possible, if narrowly so. A “soft landing” is still within reach.

Bottom line: this jobs report has everything the Fed wants to see –  moderating wage growth, steady job gains, and a rebound in the labor force. Slowing the path of rate hikes is now on the table. After Fed Chair Jay Powell’s speech at Jackson Hole, no doubt the Fed will continue to hike interest rates until inflation comes down. However, the pace of rate hikes – in particular, a 75 basis point hike later this month – might be in question.

Labor Economist

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