America’s employers slowed their hiring in August in the face of rising interest rates, high inflation and sluggish consumer spending but still added 315,000 jobs.
The U.S. government reported Friday that last month’s job gain was down from 526,000 in July and below the average gain of the previous three months. The unemployment rate rose to 3.7 per cent, from a half-century low of 3.5 per cent in July, as more Americans came off the sidelines to look for jobs.
Even though the job gain declined from July, the report still pointed to a resilient labour market and an economy that is not near recession. The number of people looking for work jumped last month, which boosted the unemployment rate because not all of them found jobs immediately. The influx of job seekers should help employers fill a near-record number of openings in the coming months.
The smaller August gain will likely be welcomed by the Federal Reserve. The Fed is rapidly raising interest rates to try to cool hiring and wage growth, which have been consistently strong. Businesses typically pass the cost of higher wages on to their customers through higher prices, thereby fuelling inflation.
Fed officials hope that by raising borrowing costs across the economy, they can reduce inflation from a near-40-year high. Some economists fear, though, that the Fed is tightening credit so aggressively that it will eventually tip the economy into recession.
Stock market has fallen every day since Fed chair’s speech
Chair Jerome Powell and other Fed officials have increasingly stressed their determination to tame inflation even at the cost of damaging the economy.
In a major speech in Jackson Hole, Wyoming last week, Powell underscored the Fed’s tight focus on curbing inflation and said he was prepared to continue raising short-term interest rates and keep them elevated to achieve that goal. He warned that the Fed’s inflation fight would likely cause pain for Americans in the form of a weaker economy and job losses.
The stock market has fallen every day since that speech as fears that the Fed may cause a recession have escalated.
Powell also said the job market is “clearly out of balance,” with demand for workers “substantially exceeding” the available supply.
“I don’t think the Fed is rooting for a poor jobs report, but they are certainly not rooting for a repeat of July,” when hiring accelerated and wage increases were strong, said Gregory Daco, chief economist at Parthenon-EY. “They are going to want to see some moderation.”
The central bank has raised its short-term rate to a range of 2.25 per cent to 2.5 per cent this year, after the fastest series of increases since it began using its short-term rate to influence the economy in the early 1990s. It has projected that its key rate will reach a range of 3.25 per cent to 3.5 per cent by year’s end.
Those rate hikes have made borrowing and spending steadily more expensive for individuals and businesses. The housing market, in particular, has been weakened by higher loan rates.
U.S. economic picture is highly uncertain
Wages are rising at the fastest pace in decades as employers scramble to fill jobs at a time when fewer Americans are working or seeking work in the aftermath of the pandemic. Average hourly pay jumped 5.2 per cent in July from a year earlier. Still, that was less than the 5.6 per cent year-over-year in March, which was the largest annual increase in 15 years of records outside of the spring of 2020, when the pandemic struck.
Higher wages aren’t necessarily inflationary if they are accompanied by greater efficiencies — if, for example, workers use machines or technology to produce more output. But worker efficiency, or productivity, has tumbled in the past year.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Wednesday that “current wage increases are not consistent with inflation returning to our 2 per cent goal” and that she thought with worker productivity so low, wage growth would have to slow to 3.5 per cent or so to reduce inflation.
Yet some skeptics warn that the Fed may be focusing excessively on the strength of the job market when there are indications that the economy is noticeably weakening. Consumer spending, for example, and manufacturing have slowed. The central bank might raise rates too far as a result, to the point where it causes a deeper recession than might be needed to conquer inflation.
“They run a risk of not realizing how much those rate hikes are restraining economic growth, if they’re just looking at the really strong employment gains,” said Jonathan Pingle, chief U.S. economist at Swiss bank UBS. “You could end up risking over tightening or moving too fast, too soon.”
The economic picture is highly uncertain, with the healthy pace of hiring and low unemployment at odds with the government’s estimate that the economy shrank in the first six months of this year, which is one informal definition of a recession.
Yet a related measure of the economy’s growth, which focuses on incomes, shows that it is still expanding, if at a weak pace.
So far, the Fed’s rate hikes have severely dented the housing market. With the average rate on a thirty-year mortgage reaching 5.66 per cent last week — double the level of a year ago — sales of existing homes have fallen for six straight months.
U.S. consumers have moderated their spending in the face of much higher prices, though they spent more in July even after adjusting for inflation. But companies’ investment in new equipment has slowed, indicating they have an increasingly cautious outlook on the economy.