US unemployment rate spikes to 3.8%

Labour market still has momentum, confirming that Fed may not raise interest rates

US job growth picked up in August, but the unemployment rate jumped to 3.8% and wage gains moderated, suggesting that labour market conditions were easing and cementing expectations that the Federal Reserve will not raise interest rates this month.

The closely watched employment report from the Labour Department on Friday also showed 736,000 people entered the job market last month, boosting the participation rate to the highest level in 3½ years. Concerns about an economic slowdown are probably luring people back into the labour market.

The economy created 110,000 fewer jobs than previously reported in June and July, which some economists said suggested there had been business closures that were not previously captured. The report followed news this week that job openings dropped to the lowest level in nearly 2½ years in July.

The labour market is slowing in response to the US central bank’s hefty rate hikes to cool demand in the economy.

“This is probably the final nail in the coffin for the chances of another rate hike by the Fed in September,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Nonfarm payrolls increased by 187,000 jobs last month after rising by 157,000 in July. Job growth averaged 150,000 per month over the past three months, sharply down from 238,000 in the three months through May.

Economists polled by Reuters had forecast payrolls would increase by 170,000 jobs last month. Employment gains, however, remain well above the roughly 100,000 jobs per month needed to keep up with the increase in the working-age population. The share of industries adding jobs was the highest in seven months, indicating underlying strength in the labour market.

A strike by Hollywood actors resulted in a decrease of 17,000 jobs in the motion picture and sound recording industries last month. The bankruptcy of trucking firm Yellow in early August led to 37,000 job losses in the truck transportation industry. Without these one-time drags, payrolls would have increased by about 241,000 in August.

Wage growth moderated last month. Average hourly earnings climbed 0.2%, the smallest rise since February 2022, after gaining 0.4% in July. In the 12 months through August, wages rose 4.3% after increasing 4.4% in July.

Wages are still rising faster than the 3.5% pace that economists say is consistent with the Fed’s 2% target. As fewer people quit their jobs in search of greener pastures, wage growth could continue to trend lower. But some economists are worried that recent union contracts including one at United Parcel Service, could put upward pressure on wages.

The United Auto Workers last month said members voted overwhelmingly in favour of authorising a strike at General Motors, Ford Motor and Stellantis, if an agreement over wages and pension plans was not reached before the current four-year contract expires on Sept 14.

Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25-5.5% range. Financial markets are now betting the central bank is done raising rates and may start cutting them next year, according to CME Group’s FedWatch Tool. Futures tied to the Fed’s policy rate show only a slight chance of a rate hike at the Sept 19-20 meeting.

There was no sign employers were reducing hours last month. The average workweek rose to 34.4 hours from 34.3 in July. That contributed to an increase in aggregate wage income, which should support consumer spending and the overall economy.

The economic outlook also got a boost from other data on Friday showing a surge in construction spending in July and a slower pace of contraction in manufacturing in August.

Though household employment increased by 222,000 in August, it was insufficient enough to absorb the 736,000 people who entered the force.

That pushed the unemployment rate to 3.8%, the highest level since February 2022, from 3.5% in July. The jobless rate remains below the Fed’s latest median estimate of 4.1% by the fourth quarter of this year. The rise in the jobless rate was concentrated among young adults. – Reuters