The Changing Landscape of the Labor Market

Economists are predicting a potential slowdown in job growth and wage increases during the month of August, offering further proof that the robust labor market is moving towards a more moderate state.

According to consensus estimates from FactSet, it is projected that the U.S. economy added 170,000 jobs in August, a decline from the 187,000 new jobs created in July. However, despite this expected dip, economists anticipate that the unemployment rate will remain steady at an impressively low 3.5%.

Should the report align closely with these predictions, it would signify a healthy labor market with job growth gradually decreasing yet still surpassing the necessary level required to keep up with population growth. This would bring the three-month average of nonfarm payroll growth in the U.S. to slightly over 180,000. It is worth noting that this figure falls just below the average of approximately 190,000 jobs per month added in the year leading up to February 2020, just before the Covid pandemic took hold.

The prospect of a more lackluster August jobs report follows closely behind other recently released data which depicted an unexpected decline in job openings during July, as well as a noticeable slowdown in the rate at which workers are voluntarily quitting their jobs. These developments indicate a decreased demand for labor, which could potentially help rebalance the labor market and alleviate pressure on wages.

Economists are predicting that average hourly earnings will have increased by 0.3% in August, a slight drop from the 0.4% rise observed in July. This would result in an annual growth rate of 4.4%, which shows stability in wage growth.

Considering all these factors, should there be another decrease in the number of jobs added on a monthly basis, it would further support the notion that the previously overheated labor market is indeed making its way back to a more sustainable pre-pandemic state.

Senior economist at EY, Lydia Boussour, aptly summarized the situation by stating, "The August jobs report will likely bring more evidence that the labor market is gradually cooling."

Labor Market Moderation May Please the Federal Reserve

The Federal Reserve has been eagerly awaiting signs that the labor market is moderating without collapsing, as it seeks to control inflation and slow down the economy. When the labor market is too strong, it can result in increased wages for workers, leading to higher inflation. However, if job openings continue to decline without a significant rise in the unemployment rate, this could indicate a more balanced labor market and help inflation fall back to its target level of 2%.

During his speech at Jackson Hole on Aug. 25, Fed Chair Jerome Powell expressed confidence that the rebalancing of the labor market will continue. However, he also stated that if there are signs that labor-market tightness is no longer easing, a monetary policy response may be necessary.

Based on this perspective, the upcoming August jobs report is expected to support the view that the Fed will keep interest rates steady at its next policy meeting on Sept. 19-20. However, if there is an unexpected boost in job growth or a larger-than-anticipated increase in wages, it could sway the decision towards another rate hike.

In addition to the jobs report, Fed officials will also consider the August inflation data before making their rate-hike decision. Although there has been a significant cooling in price growth, any surprises indicating upward pressure on inflation may prompt the central bank to contemplate a quarter-point increase in interest rates.

Analyst Boussour predicts the Fed will maintain a restrictive policy stance and keep rates unchanged through the first quarter of 2024. However, there is still room for additional policy tightening if the data justifies it.

The August jobs data will be released by the Labor Department on Friday at 8:30 a.m. EDT.