The unexpected rise in joblessness last month, along with the slowdown in hiring by US employers, indicates that the US economy is cooling as the Federal Reserve raises interest rates. The US unemployment rate increased to 3.8% in August, surprising economists who had predicted a rate of 3.5% in line with July’s figure. The government reported that 187,000 jobs were added last month, exceeding the expected 170,000. However, the higher number can be attributed partially to increased participation in the labor force. Additionally, the payrolls for June and July were revised down by a combined total of 110,000. On average, 150,000 jobs were added each month during the summer, a decrease from the 238,000 average gained between March and May. Despite these figures, stocks rose slightly on Friday as traders believe this data indicates a “soft landing” for the US economy rather than a recession. The Dow Jones Industrial Average and S&P 500 increased by 0.3% and 0.2% respectively, while the Nasdaq remained relatively unchanged. Following this release of data, the likelihood of a rate hike at the November meeting of the Federal Reserve was reduced from nearly 50% to around 35%. Becky Frankiewicz, the chief commercial officer at employment firm ManpowerGroup, commented that the labor market is gradually cooling but is not experiencing a freefall. Last month, the entertainment industry was hit by the Hollywood strike, impacting staffing, and transportation and warehouse companies reduced payroll due to the shutdown of logistics giant Yellow following a union dispute. However, jobs were added in healthcare, leisure and hospitality, and construction. The Labor Department also reported a 0.2% increase in US average hourly wages in August compared to the previous month. Wages have gone up 4.3% compared to last year, slower than the previous year but still ahead of the pre-pandemic pace. Even though the pace of hiring has slowed down, it is not declining sharply, which is welcome news for the Federal Reserve in its efforts to control inflation. The Fed aims for a “soft landing,” where hiring and growth slow down sufficiently to cool price increases without causing a recession. Previously, economists were doubtful of the Fed’s success, but optimism has grown as inflation has steadily declined from a peak of 9.1% in June 2022 to 3.2% in July. Despite the slower growth rate compared to the post-pandemic recession boom in 2020, the economy has been resilient to the increased borrowing costs. The gross domestic product (GDP) increased by 2.1% annually from April to June, as consumers continued spending and businesses increased their investments. The Fed expects a deceleration in hiring to avoid wage inflation and subsequent price increases. Thankfully, layoffs have been minimal, and the number of Americans applying for unemployment benefits has decreased for three consecutive weeks. Instead of cutting jobs, companies are reducing the number of openings available, with only 8.8 million posted in July, the lowest since March 2021. The job report released on Friday was highly awaited by the markets, as it was expected to provide insight into whether the Fed will raise interest rates. Furthermore, Americans are less likely to leave their current jobs in search of better pay and conditions. The number of people quitting their jobs in July was the lowest since February 2021. With a slower pace of quits, companies are under less pressure to raise wages to retain existing employees or attract new ones. Average hourly earnings are also growing less rapidly than the previous year, with wages up by 5.9% in March 2022 compared to the prior year. To align with the Fed’s 2% inflation goal, annual average pay increases should slow down to around 3.5%. Despite these conditions, economists and financial market analysts believe that the Fed may cease raising interest rates. In fact, nearly 90% of analysts surveyed by the CME Group expect rates to remain unchanged at the next meeting in September.
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