Commentary on today’s US Bureau of Labor Statistics Employment Situation Report

Today’s jobs report revealed that the US labor market, while still adding jobs, shows clear signs of cooling. Payrolls increased by 187,000 in August. However, jobs added in June and July were revised down by a combined 110,000, bringing the three-month average employment change to just under 150,000, the lowest level since December 2019. Earlier data from JOLTS (Job Openings and Labor Turnover Survey) showed that job openings, voluntary quits, and hiring were down—all of which points to a cooling job market, which the Fed should view constructively.

Average hourly earnings increased by 4.3 percent year-over-year in August, showing wage gains continue to slow since last year’s peak of 5.9 percent. Still, the rate of wage growth is well above prepandemic levels and is likely continuing to contribute to underlying consumer inflation. Given persistent signs of strength in consumer spending despite gradual cooling in the labor market—and elevated wage and consumer price inflation—we expect the Federal Reserve will raise interest rates at least once more before the end of 2023.

Unemployment rate ticked up in August

The Household Survey revealed that the unemployment rate rose to 3.8 percent in August from 3.5 percent in July. The increase can be attributed to the change in the labor force participation rate, which edged up by 0.2 percentage points to 62.8 percent. While participation rose, August’s data reflects a 514,000 increase in the number of unemployed persons compared to a 222,000 rise in the number of employed persons.

Participation increased for all age groups, with the largest gains occurring in younger populations. In August, labor force participation rose by 0.6 percentage points to 71.2 percent in the 20–24 age group, and by 1.2 ppts to 36.9 percent in the 16-19 age group. However, labor force participation in the 20-24 age group—as well as among older workers (65+)—remains lower than prepandemic levels. As a result, overall labor force participation remains 0.5 ppts below the February 2020 level.

In-person services lead job gains

The Establishment Survey revealed that the largest gains in payrolls were in in-person services. Three sectors—health care (+70,900), social assistance (+26,400), and leisure and hospitality (+40,000)—accounted for 73 percent of job gains in August. These industries still face labor shortages with job openings remaining elevated. Indeed, they are expected to add jobs even during a downturn.

The construction industry also added jobs (+22,000) in August, with gains concentrated in nonresidential construction fueled by increased federal infrastructure spending and factory-building. Other notable job gains were recorded in manufacturing (+16,000) and professional and business services (+19,000).

Signs of further cooling ahead

Recent trends in consumers’ behavior shifting their spending away from goods and towards services continued in August. Industries that added jobs during the pandemic recorded further job losses in August. Transportation and warehousing recorded job losses of −34,200, which include 30,000 layoffs from Yellow Corporation. The information services sector saw jobs losses of −15,000, mostly attributed to the Hollywood worker strikes. This sector has also cut jobs due to layoffs in the tech industry since November. Temporary help services—a leading indicator for hiring—continued to shed jobs, losing another −18,900 in August. This brought the cumulative losses in the industry to −241,500 in total since its peak in March 2022.

We see clear signs of a cooling labor market in recent data, given declines in job openings and voluntary quits, a rising unemployment rate, and the negative shift in consumer confidence for the labor market outlook. The Conference Board forecasts a short and shallow recession by the end of 2023 into early 2024, as high interest rates, declining pandemic savings, and the resumption of mandatory student loan repayments are all likely to negatively impact consumer spending.

As the economy slows, we expect the unemployment rate will rise further. However, once we are out of recession, labor demand will likely recover quickly as the economy rebounds. In the long term, labor shortages are expected to persist as the population continues to age.