U.S. job growth likely accelerated in August, with the unemployment rate forecast to have fallen to 4.2 percent, offering further assurance that the orderly slowdown in the labor market remained intact and cementing expectations for a quarter-point interest rate cut by the Federal Reserve this month.
The closely watched Labor Department jobs report on Friday is expected to support strong consumer spending and allay financial market fears of a recession that were fueled by a rise in the unemployment rate to a nearly three-year high of 4.3 percent in July. The fourth straight monthly increase in the jobless rate put a 50-basis-point rate cut on the table.
“The economy is going through a transition; it’s slowly collapsing under the weight of high interest rates,” said Brian Bethune, an economics professor at Boston College. “There’s enough evidence to support a sequence of 25 basis point rate cuts so far, but not a hasty 50 basis point one.”
Nonfarm payrolls likely rose by 160,000 jobs last month, according to a Reuters poll of economists. Payrolls rose by 114,000 in July, the second-smallest increase this year. Estimates ranged from 100,000 to 245,000 jobs. The slowdown in the labor market mostly reflects a reduction in hiring rather than layoffs, which remain at historically low levels.
Rising immigration, which is partly blamed for the jump in the unemployment rate from a five-decade low of 3.4% in April 2023, means the economy now needs to create 175,000 to 200,000 jobs a month to keep pace with growth in the working-age population. A modest rebound in employment is expected in sectors that were slowed by Hurricane Beryl in July.
Although the Department of Labor’s Bureau of Labor Statistics (BLS), which compiles the employment report, said Beryl had “no discernible effect” on the data, 436,000 people reported being unable to report to work due to bad weather, the highest number on record for July. Economists argued that the BLS statement was about data collection.
“There were many signs that Beryl impacted the labor market in July, including a rise in the number of people not working or working only part-time hours due to the adverse weather, a jump in the number of people reporting they were furloughed, and hits to hours worked in construction and mining,” said Nancy Vanden Houten, senior U.S. economist at Oxford Economics.
But August payrolls tend to be initially weaker relative to the consensus estimate and recent trend, before being revised higher later.
Hiring is likely to pick up in the education sector, as predicted by the model used by the government to eliminate seasonal fluctuations in the data.
However, the start of the new school year varies across the country, which can alter so-called seasonal factors. Economists noted that initial August payrolls figures have been revised upward in 10 of the past 13 years.
“Disappointing August jobs data has in the past influenced the Fed’s interest rate decisions at September meetings,” said Conrad DeQuadros, senior economic adviser at Brean Capital. “In retrospect, allowing August payrolls data to influence September policy decisions appears to have been a mistake.”
SOLID SALARY GROWTH EXPECTED
As of Thursday afternoon, financial markets were pricing in a roughly 41 percent chance of a half-point rate cut at the Federal Reserve’s Sept. 17-18 policy meeting, according to CME Group’s FedWatch tool. The odds of a 25-basis-point rate cut were around 60 percent.
Concerns about the labour market were exacerbated by government estimates last month that employment growth had been overestimated by 68,000 jobs per month in the 12 months to March. However, some economists warned against taking the benchmark revision as a sign the labour market was in trouble, arguing that a surge in immigrants was a key factor.
The Quarterly Census of Employment and Wages (QCEW) data on which the government based its baseline payrolls revision estimate does not include undocumented immigrants, a group economists believe contributed to strong job growth last year.
Business formations have declined after increasing during the pandemic, which also explains the downward revision.
The BLS on Wednesday updated its previous estimates of QCEW payroll employment through the fourth quarter of 2023.
“Based on the revisions, we think the QCEW’s initial estimate of March 2024 employment will rise by around 250,000,” said Jonathan Millar, senior economist at Barclays. “This would correspond to a downward revision of the benchmark by around 568,000, or almost 50,000 jobs per month.”
Average hourly earnings are forecast to have risen 0.3% in August, after increasing 0.2% in July. This would bring the year-over-year increase in wages to 3.7%, up from 3.6% in July.
Wage growth, which remains solid, continues to support the economy through consumer spending. The average workweek is expected to have increased to 34.3 hours, up from 34.2 in July. However, Storm Debby poses a downside risk to this forecast.
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