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The US labour market cooled in August, raising hopes that the Federal Reserve is successfully orchestrating a soft landing for the world’s largest economy.
Investors hailed a possible Goldilocks scenario in which inflation comes under control without causing a recession, as Friday’s figures revealed an uptick in the unemployment rate, subdued jobs growth and wage rises back at pre-Covid rates.
“If the Fed could have put together their ideal employment report, it would look something like today,” said Andrew Hollenhorst, an economist at Citi.
But he added: “We should be careful about looking at one month of data and saying we’re all clear.”
The vast majority of investors already expected the central bank to keep rates steady at its next meeting in late September.
But, following Friday’s data release, futures markets cut the probability of a rate rise at the subsequent November meeting from just below 50 per cent to less than 40 per cent.
Investors and policymakers are watching closely for signs that the US labour market is cooling, since jobs and wage growth are key contributors to inflation.
In comments responding to Friday’s figures, US president Joe Biden pushed back at “experts” who had argued a more severe contraction was needed to bring price rises under control.
Instead, he said his administration had managed “months of months of bringing inflation down while at the same time adding jobs and growing wages”.
The Bureau of Labor Statistics data showed that unemployment edged up to 3.8 per cent last month compared with economists’ predictions it would remain steady at near multi-decade lows at 3.5 per cent.
Monthly wage growth of 0.2 per cent was also lower than forecast, though the year-on-year growth rate of 4.3 per cent remained well above levels considered consistent with the Fed’s 2 per cent inflation target.
The economy created 187,000 new non-farm jobs in August — higher than forecasts of 170,000 but the third consecutive month below the 200,000 mark.
Totals for the previous two months were also revised to a cumulative 110,000 lower.
The wage and unemployment trends were helped by more people returning to the workforce, with the first increase in the labour force participation rate since February. Such an increase in labour supply may also serve to slow wage rises.
Natixis portfolio manager Jack Janasiewicz said that, as “getting people off the sidelines and into the jobs market” continued, it would “put downward pressure on wages in general”.
Friday’s numbers followed separate data published this week that also suggested labour demand is easing, with the number of job vacancies falling more than expected.
“The report shows the labour market is rebalancing in a good way — increases in labour force participation are what we want to see ,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income.
“A rate hike in September is now very unlikely but it’s too soon to say that all rate hikes are off the table.”
But other economists expressed fears the Fed would squeeze the economy too much.
“The odds of a hard landing keep growing as long as the Fed keeps talking about the potential for hikes,” said Priya Misra, a portfolio manager at JPMorgan Asset Management.
“Just keeping their options alive means that restrictive real rates remain,” she added, referring to the impact of expectations on real borrowing costs.
In his annual speech at the Fed’s economic symposium in Jackson Hole, Wyoming last week, Fed chair Jay Powell stressed that the central bank was “prepared to raise rates further if appropriate”, but said policymakers would be cautious as they try to balance controlling inflation with minimising damage to the broader economy.
Stock and bond prices initially rose after the data was released, but gave up their early gains. The S&P 500, which dipped into negative territory around midday, closed 0.2 per cent higher.
Additional reporting by Jennifer Hughes in New York
