The U.S. labor market slowed in August, with 315,000 jobs added in the month. This is down from 526,000 jobs added in July. The unemployment rate increased to 3.7%, up from a 50-year low of 3.5% in July and the labor force participation rate increased to 62.4%. The jobs report shows that the labor market remains strong but is cooling down from levels seen earlier in the year.
Labor Market Cooled in August
315,000 Jobs Added in August as Unemployment Rate increases to 3.7%
Top Takeaways from the Report
August Job Growth Slowed But Remains Strong
The U.S. labor market cooled in August, with 315,000 jobs added in the last month. This is a slowdown from the unexpectedly strong growth in July. Monthly job growth had averaged 471,000 heading into the August report. It appears that the growth in July was an anomaly, rather than a sign of a new trend of higher growth. The August growth was roughly in line with consensus expectations of monthly job growth.
The unemployment rate increased to 3.7% in August, from 3.5% in July. This represents an increase of 344,000 unemployed people in the last month. The extremely low unemployment rate has reflected a very tight labor market for much of the last year. Employers have struggled to find the workers they need in order to operate and grow. While the increase in the unemployment rate reflects some loosening of labor conditions the rate remains below the level needed for efficient economic operations. At a “full employment” level of unemployment, workers can find jobs and employers can find workers. In the current labor environment there are nearly two job openings for every unemployed worker.
The high point of the jobs report was a surprising increase in the labor force participation rate, which increased to 62.4% in August, from 62.1% in July. This shows that more people are coming off the sidelines and reentering the labor market. Heading into the COVID pandemic, 63.4% of the working-age population was part of the labor force. This dropped dramatically in the spring of 2020 as 22 million people lost their jobs. Since then, millions of people have returned to work as pandemic restrictions ended and the economy improved. However, the labor force participation rate remains below its pre-pandemic level. Ultimately, for the labor market to recover the participation rate needs to continue its increase and return to previous levels.
Another sign of a very tight labor market is elevated wage increases. While the long-term average of wage increases is just under 3%, the latest jobs report showed that average hourly earnings continued to increase at a much higher level of 5.2% over the past year. This high wage growth, while good for workers, is adding to inflationary pressures. When employers increase employee wages they must also increase the prices they charge to customers, which can lead to a “wage-price spiral” of increasingly higher wages chasing increasingly higher prices. A positive sign in wage growth is that on a month-to-month basis wage increases slowed to 0.3% in August, from 0.5% in July.
Price inflation has been the biggest economic struggle for the past year. The latest Consumer Price Index report showed that while price increases are down from levels earlier in the summer, inflation remains nearly as high as in the early 1980s. Prices increased 8.5% over the last year, compared to 9.1% increases the previous month. There are some positive signs that inflation may have peaked, but price increases need to slow much more to get back to the Federal Reserve’s goal of 2% annual price increases.
Growth by Industry
Total nonfarm employment increased by 315,000 jobs in August, which is down from a revised figure of 526,000 in July. The private-sector added 308,000 jobs, with the goods-producing industries adding 45,000 jobs and the service-providing industries adding 263,000 jobs. The government increased its payroll by 7,000 jobs in August, with the federal government decreasing by 2,000, state government increasing by 3,000, and local government increasing by 6,000. Notable employment growth during August happened in professional and business services (68,000); education and health services (68,000); and trade, transportation, and utilities.
The Bottom Line
The latest jobs report is an encouraging sign that employment pressures may be easing. One report does not represent a trend, but it appears that growth in the labor market is cooling compared to earlier in 2022. This is important to ease inflationary pressures and achieve the Federal Reserve’s goal of an economic soft landing. Ordinarily, a slowing labor market would be troubling, but the current slowdown is necessary to cool down an overheating job market.
This report will be an important indicator as the Federal Reserve decides how to adjust its monetary policy over the next several months. Another important report will be the Consumer Price Index on September 13. If labor and price pressures can subside the Fed will be able to achieve its goal of greater stability in the economy.
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