The August jobs report was solid, with employment up by 315,000. There were downward revisions to job growth in June and July.
- The unemployment rate rose to 3.7%, but that was because of an increase in the labor force, a good sign.
- Wage growth was solid in August but slowed from July.
- Job growth is slowing, but the labor market remains in excellent shape.
- Recession risks are elevated, but the baseline outlook is for slower growth, but no economic contraction.
- PNC expects a 50 basis point increase in the fed funds rate on September 21.
The U.S. labor market remains extremely healthy in the summer of 2022. The US economy added a very good 315,000 jobs in August from July, according to a survey of employers, and employment continues to move higher than its pre-pandemic peak. The unemployment rate rose from 3.5% in July, the lowest rate in more than 50 years, to 3.7% in August, but that was due to more people looking for work over the month, a sign of health in the economy. Wage growth slowed in August but was still above the pace of inflation.
There were downward revisions to job growth in previous months, to a still very strong 526,000 in July from 528,000, and a big downward revision to a still-solid 293,000 in June from 386,000. Over the past three months the economy has added a very good 378,000 jobs per month, well above the pre-pandemic pace, but slower than an average of almost 600,000 at the beginning of the year. The private sector added 308,000 jobs in August, with government employment up by 7,000.
Employment as measured in the household survey (different from the survey of employers) rose by a solid 442,000 in August; this followed essentially no gain in the previous four months. After the big August increase in household employment the two jobs numbers now appear to be moving in tandem, after some divergence in the spring and early summer. The labor force-the number of people working or looking for work-rose by a huge 786,000 in August. The labor force participation rate-the share of adults working or looking for work-rose to 62.4% in August, the first time it has been this high since March. It may be that the very strong labor market is drawing in some people who had been sitting on the sidelines since the pandemic. Still, the labor force participation rate was above 63% before the pandemic, and the job market remains extremely tight. The unemployment rate was 3.65% before rounding.
Goods-producing industries added 45,000 jobs in August, with increases of 22,000 in manufacturing and 16,000 in construction, despite the slowdown in homebuilding. Private service-providing industries added 263,000 jobs in August, with increases of 68,000 in education/health services and business/professional services, and 31,000 in leisure/hospitality services. There was an increase in employment of 9,000 in state and local government employment, with a loss of 2,000 federal government jobs.
Average hourly earnings increased 0.3% over the month, the smallest gain since April. On a year-over-year basis the average wage was up 5.2%, the same pace as in June and July, and down from a peak of 5.6% in March. The average workweek fell slightly to 34.5 hours in August from 34.6 hours in July. With more jobs but a shorter workweek, total hours worked fell 0.1% over the month. With the increase in wages, total labor market income was up 0.3% in August from July; with prices likely down 0.2% over the month given the huge drop in gasoline prices (CPI to be released September 13), there was a solid increase in real earnings in August.
The August jobs report was good in a number of ways. Job growth was solid in August but is slowing from earlier in the year to a more sustainable pace. The unemployment rate rose, but that was because of more people looking for a work, an encouraging sign. Wage growth is slowing, but remains good, and is now increasing after accounting for inflation.
Job growth will continue to slow through the rest of this year and in 2023 as the economy absorbs the impact of higher interest rates. The Federal Open Market Committee, concerned about inflation that is far above the Fed’s 2% objective, has been raising rates throughout 2022 in an attempt to slow economic growth and cool inflation. Already, higher interest rates are weighing on housing, and there will be further slowing in interest-rate-sensitive industries in the months ahead. The unemployment rate will increase modestly but remain around 4% for the next couple of years.
Recession risks are elevated with high inflation and the Fed responding. There is a real risk that higher interest rates to cool off growth could end up tipping the US economy into contraction. But PNC’s baseline outlook is for slower growth, but no recession, over the next couple of years.
The FOMC is deciding whether to raise the federal funds rate by 0.50 or 0.75 percentage points at its next meeting, on September 21. PNC expects an increase of 0.50 percentage points; reasons for a smaller increase include the ongoing softenings in job and wage growth in mid-2022, as well as a slowing in inflation. But the labor market is still very strong, and inflation, although slowing, remains far above the Fed’s 2% objective. The August CPI report will be an additional key to the FOMC’s decision. Right now, the fed funds futures market is pricing in a 62% probability of a 75 basis points increase in the fed funds rate on the 21st, and a 38% probability of a 50 basis point increase; these respective probabilities were 75% and 25% yesterday.
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