The U.S. job market is sending mixed signals as employers, workers and investors try to determine whether the economy is entering a sustained slowdown or simply moving through another period of uneven hiring.
Several reports released ahead of the government’s August employment figures pointed toward significant weakness. However, the official jobs report released Friday, September 4, came in considerably stronger than expected, showing that employers added 162,000 jobs during August while the unemployment rate remained unchanged at 4.1 percent.
The result was a major surprise after economists had spent much of the week preparing for another disappointing employment report.
The August gain was also substantially stronger than the revised results for the previous two months. The Bureau of Labor Statistics revised June’s payroll gain upward from 20,000 to 31,000, while July was revised from an initially reported loss of 23,000 jobs to a gain of 21,000. Together, the revisions added another 55,000 jobs to previously reported employment totals.
Those revisions make the summer labor market look somewhat healthier than it appeared just a few weeks ago. Still, economists are unlikely to dismiss concerns about weakening hiring based on a single stronger month.
One reason for caution is the unusually large difference between the government’s employment report and private payroll estimates released earlier in the week.
The ADP National Employment Report released Wednesday showed that private employers added only 38,000 jobs in August. That was the slowest pace of private-sector job creation reported by ADP since January and fell below economists’ expectations. ADP also revised its July estimate slightly higher, from 44,000 to 46,000 jobs.
The details of the ADP report showed that hiring was highly concentrated.
Companies with at least 500 employees accounted for 34,000 of the 38,000 jobs added during the month. Small establishments added a net 3,000 jobs, while medium-sized establishments employing between 50 and 499 workers added no jobs on a net basis.
There were also large differences within those categories.
Businesses with between one and 19 employees added 20,000 positions, according to ADP, while companies employing between 20 and 49 workers eliminated 17,000 positions. Among medium-sized employers, companies with 50 to 249 workers added 2,000 jobs, while businesses with 250 to 499 employees cut 2,000.
That uneven pattern suggests that the slowdown in hiring has not affected all businesses equally.
The ADP report also showed significant differences between industries. Education and health services added 45,000 jobs, making that sector the largest source of private employment growth during August. Leisure and hospitality added 16,000 positions, construction gained 12,000, and financial activities added 6,000.
Other industries moved in the opposite direction.
Manufacturing lost 17,000 jobs, while professional and business services lost 16,000. Trade, transportation and utilities declined by 5,000 positions, information employment fell by 4,000, and natural resources and mining lost another 5,000.
The official government report ultimately painted a stronger picture.
According to the Bureau of Labor Statistics, restaurants and bars were among the largest contributors to August employment growth, adding 59,000 positions. Local government education added another 42,000 jobs. Employment also continued to trend upward in nonresidential specialty trade contracting.
The information industry, however, continued to lose jobs.
The contrast between ADP’s estimate of 38,000 private-sector jobs and the government’s overall gain of 162,000 illustrates why economists generally avoid relying on any single labor-market indicator.
ADP bases its estimates on payroll information from more than half a million companies covering more than 26 million workers. The government’s employment report is produced from separate household and establishment surveys and can produce significantly different results, particularly from month to month.
Before Friday’s report, Vanguard senior economist Adam Schickling had described the labor market as going through a summer slowdown and said the weakness appeared to be concentrated more heavily in recruiting than in employers actively eliminating workers.
“The slowdown appears concentrated in recruiting rather than workforce reductions,” Schickling wrote in Vanguard’s September labor market analysis.
That distinction is important.
A labor market in which companies stop hiring can feel weak to people looking for work even if widespread layoffs never materialize. New college graduates, unemployed workers and people attempting to change careers can face increasingly difficult conditions because fewer positions are opening.
At the same time, people who already have jobs may experience relatively little disruption.
This type of environment is sometimes described by economists as a “low hire, low fire” labor market. Companies are reluctant to expand their workforces aggressively, but they are also reluctant to dismiss large numbers of existing employees.
Initial unemployment claims have remained relatively restrained. During the week ending August 29, approximately 206,000 people filed new claims for unemployment benefits, only slightly higher than the previous week’s revised figure of 204,000.
The government’s August report also showed little change in the number of unemployed Americans. Approximately 7 million people were unemployed during the month, while the unemployment rate held at 4.1 percent.
Labor-force participation improved slightly.
The labor-force participation rate increased to 61.6 percent in August, although it remains half a percentage point lower than it was in January. The employment-to-population ratio was 59.1 percent.
There was also an improvement in the number of people working part time because they could not obtain full-time employment. That figure dropped by 414,000 to approximately 4.4 million people during August.
Still, longer-term unemployment remains an area of concern.
Approximately 1.9 million Americans had been unemployed for at least 27 weeks in August. Those long-term unemployed workers represented 27 percent of all unemployed people. Another 5.7 million people were outside the labor force but said they wanted a job.
Economists had several reasons to expect August hiring to be weaker.
JPMorgan economist Abiel Reinhart noted before Friday’s report that employment growth has been relatively weak during recent summers. Private-sector jobs had declined in August during each of the previous two years, raising the possibility that seasonal factors were once again affecting the numbers.
August employment reports have also developed a history of disappointing Wall Street forecasts. Analysts at Goldman Sachs noted that August job growth had fallen short of expectations in 11 of the previous 16 years.
This year broke that pattern dramatically.
Instead of another extremely weak result, the economy added nearly three times the number of jobs many economists had anticipated. Reuters reported that forecasts ahead of the release centered around an increase of roughly 56,000 jobs, making the actual 162,000 gain a substantial upside surprise.
The result immediately shifted attention away from employment and back toward inflation.
Average hourly earnings increased by 10 cents in August to $37.75. That represented a 0.3 percent increase from July and a 3.1 percent increase from a year earlier. Average hourly earnings for production and nonsupervisory workers also increased 0.3 percent during the month, reaching $32.53.
ADP’s separate wage measurements also show that wage growth has been slowing.
ADP reported that median base pay increased 3.2 percent over the previous year. Workers who remained with the same employer experienced base-pay growth of 3.0 percent, while employees who changed jobs saw their base pay increase 4.7 percent.
ADP researcher Liv Wang said the August data showed that pay growth has been decelerating for approximately four years and that base-pay growth among lower-paid workers has lost momentum.
That could become increasingly important because inflation remains elevated.
The Consumer Price Index increased 3.4 percent from a year earlier in July. Consumer prices increased 0.1 percent during the month, while core inflation, excluding food and energy, increased 0.2 percent.
August inflation figures will not be available until September 11, when the Bureau of Labor Statistics releases the next Consumer Price Index report.
Energy prices could make that report especially important.
Global oil prices have risen sharply amid renewed instability in the Middle East and concerns about oil shipments through the Strait of Hormuz. Brent crude climbed above $97 per barrel during Thursday trading before pulling back toward the mid-$90 range. Reuters reported Brent at $97.29 per barrel on September 3 as supply concerns pushed crude to six-week highs.
Brent has risen more than 20 percent since August 4, adding another potential source of inflationary pressure just as policymakers are attempting to determine whether price increases are becoming more persistent.
Higher crude prices can eventually affect consumers through gasoline, diesel fuel, airline transportation and shipping costs. Businesses can also face higher transportation and production expenses, some of which may eventually be passed along through higher prices.
The combination of stronger employment and rising energy prices creates a complicated situation for the Federal Reserve.
A weak jobs report might have given policymakers more reason to focus on supporting employment. Instead, the surprisingly strong August hiring figures provide evidence that the labor market remains resilient enough to withstand relatively restrictive monetary policy.
Financial markets reacted accordingly.
Treasury yields and the U.S. dollar moved higher after the employment report as investors increased expectations that the Federal Reserve could raise interest rates at its September meeting. Stocks moved lower as markets reconsidered the possibility that interest rates could remain elevated or move higher.
The next major piece of evidence will therefore be inflation rather than employment.
If the September 11 Consumer Price Index report shows that inflation accelerated significantly in August, the combination of stronger job creation, rising oil prices and persistent price pressures could strengthen the case for tighter monetary policy.
If inflation comes in weaker than expected, Federal Reserve officials may have more flexibility.
For consumers, the situation is similarly complicated.
A stronger labor market is generally positive because continued job creation supports household income and reduces the risk of widespread unemployment. At the same time, wage growth of approximately 3.1 percent is not particularly strong if consumer prices are rising at a comparable or faster rate.
Lower-income households may be particularly vulnerable because food, housing, gasoline and utility expenses consume a larger percentage of their income.
Higher gasoline prices can also have an immediate effect on disposable income. Unlike many other expenses, commuting costs can be difficult for households to reduce quickly, especially in areas where workers depend heavily on automobiles.
Businesses face their own uncertainty.
Large companies appear to have been responsible for most of the hiring captured by ADP during August, while small and medium-sized businesses showed far less momentum. Smaller employers can be particularly sensitive to interest rates, borrowing costs, labor expenses and changes in consumer spending.
The August figures therefore do not provide a simple picture of either a booming economy or a collapsing job market.
Instead, they suggest a labor market with significant differences beneath the headline numbers.
Hiring remains difficult in some industries and for some types of workers. Manufacturing, professional services and information technology have all shown signs of weakness. Long-term unemployment remains elevated, and wage growth has been slowing.
At the same time, layoffs remain relatively limited, unemployment is still only 4.1 percent, labor-force participation improved in August, and employers added far more jobs than economists anticipated.
The unexpectedly strong August employment report therefore reduces immediate fears that the U.S. labor market is rapidly deteriorating.
It does not eliminate the warning signs.
With hiring still uneven, wage growth slowing, oil prices climbing and inflation running above the Federal Reserve’s preferred level, economists will now turn their attention to the September 11 inflation report.
That data may provide the next major indication of where the U.S. economy is headed and could play an important role in determining the Federal Reserve’s next move on interest rates.
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