The labor market looks like it’s finally buckling under the strain of one of the most intense interest rate tightening cycles in decades.
That’s despite a period of prolonged strength and relative insensitivity in the job market to interest rate hikes that left many economists confused.
The unemployment rate climbed to 3.8 percent in August as the economy added 187,000 jobs. That’s up from 3.5 percent in July.
US adds 187K jobs in August, jobless rate rises to 3.8 percent
There were about 5.85 million people out of work in July, and now there are 6.37 million people out of work, according to calculations by The Hill. Most Americans work in the service sector.
Here are five things to know about the new position of the economy.
Labor force participation is up while the job market is tighter
The job openings and labor turnover survey (JOLTS) reported earlier this week put the number of job openings at 8.8 million. With 6.37 million people currently looking for a job, the ratio of open jobs to job seekers is now 1.38 to 1.
That’s much lower than earlier in this cycle when there were nearly two open jobs for every job seeker.
While that’s good news for the Federal Reserve, which seeks to quell prices through diminishing wage pressures, it’s obviously bad news for American workers, who have had more freedom from their employers during the pandemic.
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The spike in unemployment, however, was driven largely by a flood of new job seekers rather than a jump in layoffs.
Labor force participation is also higher, which means that more people are coming into the workforce. That number jumped up to 62.8 percent after holding steady from March through July at 62.6 percent.
Downward revisions in previous months
There were significant downward revisions in the number of jobs added to the economy in the previous two months, so the picture of the continued strength of the labor market has faded.
The number of workers who don’t work on farms was pulled down for June to 105,000 from 185,000.
The number for July was pulled down by 30,000 jobs to 157,000 from 187,000.
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“While the one month change in payrolls picked up from 157k to 187k, there is clearer evidence now of slowing labor demand. The average monthly payroll gain over the last three months has fallen to 150k after the downward revisions to June and July. This is consistent with other indicators of labor demand such as hours and job openings,” Brian Coulton, chief economist with Fitch Ratings, told The Hill.
A weaker job market is still strong by pre-COVID standards
Job seekers enjoyed a historically strong job market for years after the onset of the COVID-19 pandemic in 2020. A record-breaking surge in job openings gave workers leverage for higher and better working conditions, especially in industries with relatively lower pay.
While workers may be losing an edge on their employers, economists say the job market is still strong enough to support the economy and jobseekers looking for a new gig.
Julia Pollak, chief economist at ZipRecruiter, said in a Friday analysis that the job market is at “ideal cruising altitude, high enough to keep the unemployment rate low while creating more opportunities for workers to come in off the sidelines, but low enough so as not to cause a resurgence of inflation.”
The Fed may have issued its last rate hike
The Fed seems likely to forgo a rate hike in September after the August jobs report showed a steady slowdown in the job market. While the odds of a September hike were already low before Friday, traders give the Fed a 93 percent change of keeping rates steady, according to the CME FedWatch tool.
The sharp increase in the jobless rate, steep downward revisions and slower job growth are clear signs of the labor market weakening after more than year of steep rate increases.
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The Fed will get one more month of consumer price index and producer price index data to mull before its Sept. 20 rate decision.
If price growth continues to slow, the Fed could keep rates steady at two-decade highs to keep pressure on inflation without pushing the economy into a recession.
“With inflation set to continue slowing, the Fed is surely not hiking interest rates in September and is unlikely to do so in November either,” ING chief international economist James Knightley said in an analysis.
A steeper slowdown could pose problems for Biden
After nearly three years of torrid growth, the U.S. economy is easing back into the slow but steady expansion seen before the pandemic.
August could mark a turning point in the Fed’s fight against inflation and help bring a relatively painless return to price stability before the end of the year. Even so, further Fed rate hikes or the delayed impact of previous increases are clouds lingering over the second half of 2023.
“The U.S. economy has become a bit of a guessing game,” said Callie Cox, U.S. investment analyst at online trading platform eToro.
“Inflation data is heating up again, yet the job market may still be weakening. And on top of that, we’re heading into a seasonally weak period of the year. No wonder investors seem nervous and jittery.”
If the U.S. does slip into recession, it could be ruinous for President Biden’s reelection campaign and Democratic hopes of keeping control of the Senate.
The rapid post-pandemic recovery is a focal point of Biden’s pitch for another term, but it could be overshadowed by a painful downturn after years of high inflation.
“Unemployment is a domino in the economy that you don’t want to fall,” Cox said.