In August, U.S. employers brought on board just 142,000 new jobs, a disappointing figure that indicates only a partial recovery in hiring after previous challenges had limited job growth the month before, raising concerns about a potential recession.

Additionally, the job increases for June and July were significantly revised downward, providing a bleaker outlook for the job market during early summer. This information, along with the revisions, may influence the Federal Reserve to implement more significant cuts to its key interest rate in an upcoming meeting, experts suggest.

The unemployment rate, derived from a separate household survey, decreased from 4.3% to 4.2%, according to data released by the Labor Department on Friday.

Earlier forecasts by Bloomberg had anticipated that 163,000 jobs would be added last month.

Revisions reflected a drop in payroll increases for June from 179,000 to 118,000 and for July from 114,000 to 89,000, suggesting that the job market may be cooling off quicker than expected.

How fast are wages growing?

In August, the average hourly wage increased by 14 cents to reach $35.21, resulting in a yearly growth rate rise from 3.6% to 3.8%.

Wage growth has generally slowed down as the labor shortages related to the pandemic have eased. Economists suggest that wage increases should ideally drop to 3.5% to align with the Federal Reserve’s goal of 2% inflation.

However, Nancy Vanden Houten from Oxford Economics noted that recent improvements in productivity could allow wage gains of up to 4% to still be compatible with the Fed’s inflation targets. This is because more profitable companies can absorb labor costs without passing them on to consumers.

How much is the Fed expected to cut rates in September?

This jobs report might encourage the Federal Reserve to consider cutting its key interest rate by half a percentage point during its upcoming meeting instead of the previously expected quarter point, although opinions among experts vary.

Before the data was released, some analysts suggested that reductions in rates might require job gains to drop below 100,000, potentially in conjunction with a rising unemployment rate. However, the downward revisions for June and July indicate a more pronounced cooling of the labor market than previously thought.

Paul Ashworth from Capital Economics commented that the report “was probably just enough” to keep the Fed on track for a quarter-point interest rate cut, but acknowledged “the labor market is clearly experiencing a marked slowdown.”

Conversely, Seema Shah, Chief Global Strategist at Principal Asset Management, remarked, “Given that inflation pressures are low, there is no reason for the Fed to hesitate in making significant rate cuts.”

In 2022 and 2023, the Fed raised its key interest rate from nearly zero to a peak of 5.25% to 5.5% in an effort to combat inflation. Following a 40-year high of 9.1% in mid-2022, inflation is approaching the Fed’s target of 2%, and Fed Chair Jerome Powell has indicated that officials are equally focused on nurturing a slowing labor market.

Which industries are adding jobs?

In August, the leisure and hospitality sector led job growth with 46,000 new positions. Other sectors seeing job increases include construction with 34,000, healthcare with 31,000, the public sector with 24,000 (particularly in local government), and social assistance with 13,000 jobs added.

Conversely, professional and business services only added 8,000 jobs, while the manufacturing sector experienced a loss of 24,000 jobs, and retail lost 11,000 positions.

What is the current state of the labor market?

Analysts had anticipated a significant rebound in job growth following earlier disruptions that impacted July hiring. Factors like Hurricane Beryl hitting Texas and severe heatwaves affecting California likely hampered payroll numbers. Approximately 436,000 individuals reported that they were unable to work due to adverse weather conditions.

Additionally, annual summer shutdowns in auto plants occurred later than usual this year, complicating Labour Department adjustments meant to normalize the data. Economist Michael Reid from RBC Capital Markets suggested these closures made it hard to assess the actual figures.

In total, weather-related events and plant shutdowns are estimated to have reduced job numbers by roughly 60,000 in July. Recovery from these effects could have contributed similarly to last month’s payroll figures.

Another factor to consider is the difficulty the Labor Department faces in adjusting the August numbers for returning school teachers and seasonal employees in sectors like restaurants, hotels, and amusement parks, as the start of school varies each year, according to economist Nancy Vanden Houten.

Is the job market cooling off?

Overall job growth has been decelerating as the recovery from the pandemic lessens and the Federal Reserve’s elevated interest rates to curb inflation begin to impact hiring and investment levels among businesses.

As a result, forecasters have acknowledged the possibility that the labor market is cooling off more rapidly than previously thought.

The Federal Reserve aims to reduce inflation, but the expected recovery in August may not have occurred as planned. A different report this week indicated that job openings dropped to 7.7 million in July, marking the lowest point since January 2021, which suggests that the hiring slowdown may continue.

According to estimates from Moody’s Analytics, the average job growth per month is expected to decrease to approximately 100,000 by the beginning of next year.

What is the Sahm Rule?

Even though unemployment has increased by about half a percent over the past year, which some interpret as a signal that the U.S. could be in a recession according to a well-known rule, experts are not as concerned. They emphasize that much of the rise in the unemployment rate is due to a substantial influx of people into the labor market, particularly immigrants, rather than significant layoffs.

However, Van Houten pointed out that increasing unemployment can negatively impact the economy, even if not directly linked to job cuts. A slowdown in hiring often extends the duration it takes for unemployed individuals to secure new positions, leading them to cut back on spending. This reduced consumer spending could prompt businesses to further limit hiring or even engage in layoffs.