Slow job gains make a Fed rate cut very likely.
Nonfarm payrolls (NFP) rose by only 22,000 for August, down from an upwardly revised 79,000 for July. June was revised to a drop of 13,000. Markets were looking for a gain of 79,000 for August. The three-month average of NFP increases slowed to 29,000 in August, below the breakeven level of about 50,000 (slower than in prior years because of lack of immigration and increasing deportations). NFP for goods producing industries dropped by 25,000 while services industries were up by 63,000. Average hourly earnings rose by 0.3 percent, its recent trend, but this slowed the growth rate over the past year to 3.7 percent.
The smaller and more volatile household survey showed that the unemployment rate (U-3) edged higher to 4.3 percent – a level that most economists consider to be about the “full employment” rate. The number of employed workers jumped by 288,000 – but this series moves sharply from month-to-month. Finally, the labor force participation rate rose a tad to 62.3 percent – not much changed in recent months, but down from 62.7 percent from a year ago.
The slowdown in NFP gains over the past several months suggests that the overall economy is cooling. Some have suggested that early use of AI is reducing job demand without impacting overall economic growth. While possible, it’s probably too early for AI to have had a meaningful impact on either the job market or overall economic growth. As noted above, the likely reduction in the breakeven NFP growth rate means that the slowdown in NFP growth isn’t as dire as it would be if the breakeven rate was still above 100,000. Still, NFP gains are now below trend which signals slower economic growth – but not negative growth.
From the Fed’s perspective, today’s weaker jobs report should make Fed easing at the September 17 FOMC meeting almost a certainty (next week’s CPI will be the final important data that could sway the decision). The CME’s FedWatch tool shows a 98 percent probability of a 25 bps point rate cut for September – and now a 2 percent chance of a 50 bps cut. If next week’s CPI is a bit “hotter” then the odds of a 50 bps cut will be reduced from even this low level. By year end, markets now fully expect at least one rate cut, with a 2 percent chance of only 25 bps, 27 percent of 50 bps, 70 percent of 75 bps, and a bit over 1 percent for a full 100 bps. What the Fed actually does will depend upon jobs and inflation data over the next several months. Longer-term interest rates have responded to greater expectations of lower short-term rates (Fed easing) by falling further. If the Fed continues to ease in coming months, longer-term rates should also move lower, although probably by less than the Fed cuts rates.
David W. Berson, Ph.D., CBE
Chief Economist
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