By Mory Keita
Last week’s numbers failed to reassure investors that an aggressive rate cut is coming.
The much-anticipated August labor report released on Friday was mixed but below consensus expectations.
Nonfarm payrolls rose by 142,000 in August, missing the 165,000 consensus and down from July’s revised 89,000. Private payrolls also fell short, coming in at 118,000 versus the expected 140,000. Overall, payroll numbers were lowered by 86,000 for June and July, bringing the three-month average down to 116,000 from July’s 140,000. The bulk of the payroll increase came from the service sector (108,000), while goods employment slowed. Health care and social assistance continued to generate significant private-sector jobs.
In the household survey, employment rose by 168,000 after a 67,000 increase in July. Labor force participation held steady at 62.7%, as expected, and the unemployment rate dipped to 4.2% from July’s 4.3%, in line with consensus and marking its first decrease in five months.
On the wages front, average hourly earnings were stronger than expected at 0.4%, up from July’s 0.2%, and ahead of the 0.3% forecast, with information and technology sectors driving this month’s growth.
Overall, we see the report as confirming weakness in the labor sector that has seen both fewer layoffs and a hiring slowdown. The current pace of job growth (an average of 116,000 over three months) is now below the San Francisco Fed’s suggested short-run “breakeven” rate of 130,000 jobs per month. Wage growth remains resilient, an important factor for the consumer consumption outlook and economy at large.
Takeaways
In our view, the report confirms that the labor market has slowed enough to support the start of an easing cycle but is not weak enough by itself to ensure a 50-basis point cut by the Federal Reserve later this month – likely disappointing investors. Comments by Fed members John Williams and Chris Waller after the release failed to indicate an aggressive pace of cuts.
To conclude, we continue to anticipate a September start to rate cuts, and believe it likely that there will be three straight 25-basis point cuts this year, with the neutral rate settling at around 3.50% over time. In our view, the path of the Fed and bond market will continue to be heavily influenced by economic data, with a special focus on labor.
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