WASHINGTON: A strong August jobs report means the US Federal Reserve will continue to aggressively raise interest rates, though a surge in the labour force could give central bankers the option to back off a little if they choose.
US employers added a healthy number of jobs in August and a steady stream of people entering the job market pushed the unemployment rate higher, pointing to an easing of labour constraints and offering mixed implications for the Fed.
Nonfarm payrolls increased by 315,000 last month following an advance of 526,000 advance in July, a Labor Department report showed on Friday. The unemployment rate unexpectedly rose to a six-month high of 3.7%, the first increase since January, as the participation rate climbed.
Economists had projected a gain of almost 300,000 gain in payrolls and a 3.5% jobless rate, based on the median estimates in a Bloomberg survey.
Despite moderating job growth, the still-solid employment gain points to a healthy appetite for labour amid high inflation, rising interest rates and an uncertain economic outlook. Such demand, along with repeated pay rises, continues to underpin consumer spending.
However, the jump in participation, which could lead to a further cooling in monthly wage growth, added to signs that inflation pressures are slowing. That is welcome news for the Fed as it debates its next interest-rate decision.
In light of the new data, some analysts are paring back bets for a rate increase of 75 basis points when the federal Open Market Committee meets on Sept 20 and 21. Some believe 50 basis points will be enough.
But Fed officials continue to signal that the get-tough approach to inflation is not flagging. Much will depend, though, on consumer price data due ahead of the policy meeting.
“This is really what the Fed is hoping for,” former Fed governor and University of Chicago professor Randall Kroszner said. “More people are coming back into the labour market. That helps to reduce the tightness of that market.”
The labour force participation rate — the share of the population that is working or looking for work — advanced to 62.4%, matching the highest since March 2020. The rate for workers ages 25-54 rose by the most since June 2020 to 82.8%. Teen participation also surged.
“Most of the new labour force entrants found work, particularly part-time, while the remainder of these new entrants are still searching,” Mizuho Financial Group economists Alex Pelle and Steven Ricchiuto said. The number of people working part-time for economic reasons jumped for a second month.
The job gains were led by professional and business services, health care and retail trade. Leisure and hospitality posted the smallest payrolls gain since a decline in December 2020.
While a persistent mismatch between labour supply and demand has driven businesses to bid up wages, the report shows some encouraging signs that the two are coming more in line. Average hourly earnings rose 0.3% from the prior month and were up 5.2% from a year earlier.
Fed chairman Jerome Powell emphasised the “out of balance” nature of the labour market in a speech last week while also acknowledging that the combination of higher rates, slower growth and a softer labour market will “bring some pain” to households and businesses.
The report is also likely to be welcomed by President Joe Biden and his advisers as they struggle to craft a positive economic message amid hot inflation ahead of the midterm elections, where they are defending thin congressional majorities.
