US job growth slows down in August amid rising inflation and interest rates

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The US economy added 187,000 jobs in August, slightly above the expectations of economists, but the unemployment rate unexpectedly rose to 3.8%, the highest level since February 2022, according to the latest report from the Labor Department. The report also revised down the job gains for June and July by a total of 110,000, indicating that the labor market is losing momentum as the Federal Reserve tightens its monetary policy to fight inflation.

Fed may pause rate hikes after disappointing jobs report

The Fed has raised its benchmark interest rate four times since December 2022, from 0.25% to 1%, in an attempt to prevent the economy from overheating and keep inflation under control. However, the latest jobs report suggests that the Fed’s rate hikes may be having a negative impact on the labor market, as employers become more cautious about hiring and workers face higher borrowing costs.

The Fed has signaled that it plans to raise rates one more time this year, possibly in September or November, but some analysts believe that the central bank may reconsider its stance after seeing the weak jobs data. The odds of a September rate hike dropped to just 7% on Friday, according to the CME Group’s FedWatch tool, which tracks market expectations. The probability of a November rate hike also fell to 36.5%.

US job growth slows down in August

“The Fed couldn’t hope for a better report in their fight against inflation,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Wages are down slightly and the unemployment rate ticked up, both of which are signs that wage pressures and an overheated job market are subsiding.”

Wage growth remains sluggish despite labor shortages

One of the puzzles of the current labor market is that wage growth has been modest despite the record number of job openings and the low unemployment rate. In August, average hourly earnings rose by 0.2% from the previous month and by 4.3% from a year ago, both below the expectations of economists.

Some economists have argued that wage growth is being held back by structural factors, such as the decline of unionization, the rise of automation and globalization, and the mismatch between workers’ skills and employers’ needs. Others have suggested that wage growth may pick up in the coming months as employers compete for workers and as pandemic-related factors fade away.

One of these factors is the enhanced unemployment benefits that were introduced during the COVID-19 crisis, which some critics have blamed for discouraging workers from returning to work. These benefits are set to expire on September 6 for about 8.9 million Americans, which could boost labor supply and ease hiring difficulties for some sectors.

Job gains were broad-based across industries

Despite the slowdown in overall job growth, most industries added jobs in August, reflecting the continued recovery of the economy from the pandemic-induced recession. The health care sector added 71,000 jobs, followed by leisure and hospitality with 40,000 jobs, social assistance with 26,000 jobs, and construction with 22,000 jobs.

Some sectors that were hit hard by the pandemic saw a decline in employment in August, such as retail trade (-29,000), transportation and warehousing (-8,000), and arts, entertainment, and recreation (-7,000). These sectors may face further challenges as the Delta variant of the coronavirus spreads across the country and threatens to dampen consumer confidence and spending.

The report also showed that the labor force participation rate increased slightly to 63.1%, the highest level since March 2020. This means that more people entered or re-entered the labor market in August, which could explain why the unemployment rate rose despite the job gains.

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