Commentary Directory

All Signs Point to a Weaker Labor Market in August

Jacob Hess
September 01, 2023

The weakness in the ADP employment report earlier this week was confirmed by similar numbers in the BLS report, and additional data supports the narrative of a loosening labor market. In August, nonfarm payroll employment increased just 187,000 showing that hiring in the US has clearly slowed its pace. On top of the weaker number reported in August, we got substantial revisions downward in previous months. The employment gain in June was revised lower by a huge -80,000, resulting in a third estimate of just 105,000 for that month. A smaller revision of -30,000 was reported for the month of July, and that gain is now just 157,000. Together, this means that there were 110,000 job losses just in revisions! Funnily enough, the revisions mean that August’s job gains of 187,000 is the highest of the summer, but it is almost guaranteed that the final number will see similar downgrades if that trend continues. In 2023, the late downward revisions have caused a distorted view of the labor market as initial reports often have mischaracterized how strong hiring is.

From BLS

There is plenty more data in this report to properly describe the true weakness of the labor market. Sluggish hiring in August led to a substantial increase in the unemployment rate, up 0.3 ppts to 3.8%. This is the highest since early 2022 which is significant, but it is also only one tick higher than a year ago. The total rise in the number of unemployed was quite large at 514,000 which means that there are now a total of 6.4 million unemployed individuals in the US. Within that group, there was a strong increase of 294,000 in the total number of job losers or people who did temporary jobs. While that was the largest reason for unemployment, there was also a significant group of people who entered the labor force in August. Specifically, the BLS reported that there were 77,000 reentrants and 94,000 new entrants and both groups are larger than they were a year ago. This led to the participation rate ticking up 0.2 ppts to 62.8%. The increase in participation rate translates to an additional 736,000 people in the labor force which is great news for businesses facing labor shortages.

Data on average hourly earnings also showed some weakness, but the progress was less jarring. At the aggregate level, hourly earnings was up 0.24% MoM in August which caused the annual rate to slow to 4.29% YoY, down from the 4.36% YoY in July. Both goods and services sector wages slowed at the annual rate, up 5.15% YoY (prev 5.29% YoY) and up 4.07% YoY (prev 4.12% YoY) respectively. ADP pay data saw a much more substantial decline, but it was also higher to begin with. While this months decelerations in wage growth in encouraging, the short-term trend is still a bit too high for the Fed. The current monthly rate of wage growth annualized is just 2.88%, but higher growth in June and July results in the average growth of the last three months annualized is a more substantial 4.49%.

In general, though, this morning’s jobs report is a significant piece of evidence in the case for a weakening labor market. Job gains are getting weaker, in both initial reporting and revisions, and the unemployment rate is ticking up. Not only are we seeing substantial increases in the supply of labor through higher participation, but we are seeing a steeper rise in the number of unemployed. While wage growth is still proving to be a bit sticky, it likely will move a few months behind weaker hiring data. Thus, further deceleration should be expected in September and Q4. The Fed will undoubtedly take this report as a reason to pause in September, but there are still some lingering fears that inflation could rebound which would reinforce their belief that a final hike this month is the correct move. However, this will not stop the market and observers from becoming markedly more dovish in response to the weak employment data today.