The US Employment Report for August showed a partial reversal of last month’s downbeat numbers that roiled global markets. Nonfarm payrolls added 142,000 in August, while July’s lower-than-expected gains were revised down further to 89,000 (−25,000 revision) and June was revised down to 118,000 (−61,000). Unemployment ticked down by 48,000 in August, lowering the rate to 4.2% from 4.3% in July.

While the report offered relief that the labor market continues to cool at a sustainable pace, the modest pace of hiring and uncertainty of revisions remain the focus going forward. August’s report does not change our labor market outlook: job gains have softened over the past year, but indicators of layoffs and unemployment claims still remain low by historical standards.

This may be what a soft landing in the labor market looks like. Many labor market metrics are now at or slightly below 2019 levels but without signs of deterioration. This report should not alter the Fed’s course. We continue to expect September’s rate cut will be 25 basis points — signaling normalization rather than outright weakness. The turn in interest rates should help boost business activity and improve the hiring outlook into 2025.

Trusted Insights for What’s Ahead™:

• The August Employment Report showed a partial reversal of July’s concerning signals as payroll gains improved to a healthy level and unemployment ticked back down.
• We continue to expect the FOMC to lower interest rates by 25bps in September, reflecting labor market normalization rather than weakness.
• Job openings fell to a 2-year low in July; while still above pre-pandemic levels, the steady decline since 2022 should bolster the Fed’s confidence that labor demand has been brought into balance relative to labor supply.
• The declining job-finding rate for unemployed workers suggests that current job-seekers face incremental difficulties amid slower hiring.
• Despite softening signals, layoffs and unemployment claims remain low, supporting the view that the labor market continues to cool sustainability without signs of deterioration.

Figure 1. Payrolls cooling; preliminary revisions make pace uncertainty

Report Highlights:

Payroll Growth Rebounds but Hiring Becomes Central Concern

After a weak July report, payrolls grew 142,000 in August while the number of industries gaining workers expanded. Yet, downward revisions to June and July’s gains totaling 86,000 complicate the trend of recent employment growth. The household survey employment measure gained 168,000 in August — the largest rise since March — and has now recorded three consecutive monthly gains. Given low payroll readings since June, the household survey lends support to a continued growth trend.

The same industries continued to lead job growth in August: healthcare (+44,100), leisure & hospitality (+46,000), construction (+34,000), and government (+24,000). Meanwhile, small monthly losses continue in manufacturing (−24,000), retail (−11,100), and information & technology (−7,000). Other industries are generally moving sideways. The diffusion index of industry job gains (the net count of industries adding/subtracting jobs) also improved in August, after falling below the 50 threshold in July that typically indicates recession conditions. The trend in payroll gains as well as their breadth will continue to be key indicators.

Despite the August rebound, other data also underscore a soft hiring environment. Figure 1 shows payroll gains over Q2 2023 – Q1 2024 discounted by the preliminary revisions announced last week that could trim 818,000 in total from the period (See ESF brief). If assuming similar revisions to recent gains, 2024 payrolls would align closer to the household survey employment measure, JOLTS hiring, and other measures.

Aggregate Hours, Other Indicators Show Additional Weakness

Growth in aggregate hours worked have begun leveling off in 2024 after a steady rise tied to the recovery in employment (Figure 2). Overall, total hours have recovered to the prior pre-pandemic trend, highlighting that the labor market remains roughly at full employment levels even amid signals of softening.

Since March, however, aggregate hours have been flat as household job growth has plateaued. Average weekly hours so far have not declined substantially as they would if firms were pulling back on activity. The August report showed an uptick in average hours; however, this will remain a key indicator to assess for ongoing stress.

Figure 2. Aggregate hours show continued decline

The Federal Reserve’s quarterly Beige Book for August, compiling summaries of activity across the 12 regional Fed banks, underscored that hours are an important barometer of current conditions. That report highlighted that while “layoffs remained rare”, companies have “reduced shifts and hours” and shifted hiring “to be primarily for replacement, rather than growth.” August data from the ISM Services and ISM Manufacturing surveys reiterated these trends, where job gains and new openings have slowed “as companies look to control costs during a period of economic and political uncertainty.” Both layoffs and average hours should be monitored closely going forward for signs of acceleration in softening.

Partial Recovery from July’s Upturn in Unemployment

Unemployment fell in August to 4.2% following a July jump to 4.3%. The unemployment rate has risen consistently since reaching an all-time low of 3.4% in April 2023. Unemployment is now on par with the 2017 economy, where additional labor market slack was shored up ahead of the pandemic. While the current rate remains low by historical standards, its rise remains a top concern given the softening hiring outlook. However, the current unemployment rate of 4.2% remains below the estimates of its natural rate (~4.4%) that Fed officials target to ensure labor market pressures are not inflationary. A gradual rise in unemployment—particularly one that continues to come as a result of labor force growth—is consistent with the Fed’s mandate to tame prices.

July’s unemployment jump was also driven by a spike in temporary unemployment, which partially reversed in August (Figure 3). Temporary unemployment fell 190,000 in the month, after a 249,000 rise in July. The number of workers on permanent layoff—1.69 million in August—remains in mild territory and has not warrented concern.

Figure 3. Temporary layoffs reverse in August

Unemployment continues to be driven largely by labor market re-entrants and new entrants. This highlights the growing challenge of low hiring to absorb continued labor force growth and to match jobs to those laid off, though number of layoffs currently remains small. Taken together, August’s reversion in unemployment provides relief against the risk of a faster deterioration in the labor market. That said, concerns remain beyond the unemployment rate, including a steady rise in those reporting part-time work for both economic and non-economic reasons.

Job Openings Fall to Three-year Low Indicating More Balanced Labor Market

The July JOLTS report released Wednesday showed job openings fell to 7.67 million—the lowest mark since January 2021. The larger-than-expected decline followed June’s downwardly revised 7.91 million vacancies (initially 8.18 million). Openings as a share of employment (Figure 4) highlights normalization in labor demand, which is quickly approaching its pre-pandemic peak.

July’s largest declines in openings came in healthcare (−187,000); state & local government, excluding education (−101,000); and trade and transportation (-88,000) (Figure 4). Healthcare and government—two sectors leading monthly job gains—still show outsized unmet demand for workers, with 1.4 million and 924,000 openings remaining, respectively.

Layoffs ticked up slightly to 1.76 million, the highest since March 2023. Yet as a share, layoffs continue to remain well below pre-pandemic rates, where the economy was running hot. Among sectors, layoffs rose in accommodation & food services (+75,000), construction (+39,000), finance (+23,000), and information (+6,000). Professional & business services continues to see the highest churn, with 1.5 million vacancies in July, along with layoffs of 416,000 and hiring of 970,000.

Figure 4. Job openings normalize to pre-pandemic levels, layoffs remain subdued

Openings to Unemployed Works Balances

Even with the slight moderation in unemployment in August, the July data now points to an openings-to-unemployed ratio of 1.07—the lowest in three years after peaking above 2:1 in March 2022 (Figure 5). Like other data, this metric suggests today’s labor market is on par with roughly 2017. Job openings have retreated from an all-time high 12.2 million in March 2022 to 7.7 million in July. That is still higher that at any point pre-pandemic, yet compared against the number of unemployed workers, has come into balance with prior levels. A decline in job openings to better match labor supply has been welcomed by the Fed. The moderation of job openings to roughly pre-pandemic levels across these measures should provide the Fed confidence to proceed with its September interest rate decision.

Figure 5. Job openings now in balance with unemployment

Job-Finding Is Challenging Job-Seekers

Yet, while the number of job seekers and job openings have come into better alignment—rates of re-employment suggest growing challenges for new and returning entrants to the workforce. Figure 6 shows the average job-finding-rate based on the probability of re-employment among those unemployed. The downward trend since 2022  suggests that absorption has gradually fallen amid slower hiring.

The trend is more indicative than the rate itself given that each cycle differs in its starting place of unemployment. Importantly, this data does not show a collapse in job-finding; rather, those entering the labor market have found it incrementally harder to find a job. That is supported by The Conference Board Consumer Confidence Index for August, August, which found appraisals of job availability dimming.  

Figure 6. Job finding rates from unemployment are trending down