The job market lost momentum this summer, and rate cuts are imminent
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The great American job creation machine began creaking more slowly this summer, and a response from the Federal Reserve is near — though the scale of that response remains in question.
Why it matters: That's the takeaway from a much-anticipated August jobs report out on Friday, which showed job creation slowing down even as the unemployment rate remained relatively low.
- The data was ambiguous enough that it remains uncertain whether the Fed will deliver its customary quarter-point interest rate cut at a meeting concluding Sept. 18 or act more aggressively with a half-point rate cut.
- Speeches from Fed leaders on Friday morning did not decisively tilt toward one path or the other, and financial markets priced the decision as something of a coin flip.
Between the lines: A surprisingly weak July jobs report released five weeks ago set off alarm bells about a broader slowdown. The August numbers confirmed the slowdown is underway while not pointing toward recession risk escalating further.
What they're saying: "A lifeline from the Federal Reserve in the form of an interest rate cut is likely imminent, but there are questions if it's coming too late or if it will be strong enough to pull the market back," Indeed's Nick Bunker wrote in a note.
- "Employers continue to add jobs, but the current pace is approaching stall speeds," Bunker added.
Driving the news: The economy added 142,000 jobs last month, but downward revisions to previous months' data — subtracting 86,000 positions from the job growth tally for June and July combined — took the shine off the headline number.
- Job gains over the past three months averaged 116,000 per month. In the first three months of 2024, the economy added 269,000 jobs on average.
- The unemployment rate fell back to 4.2% from 4.3%, which is misleading. Unrounded, the unemployment rate was essentially flat: It fell to 4.22% last month from 4.25% in July.
- That leaves the jobless rate well above its modern low of 3.4%, reached in April 2023.
What to watch: The report contained a few bright spots confirming that while the labor market may be slowing, it isn't all-out collapsing.
- Employment levels remain strong among prime-age workers, or those ages 25-54. 80.9% of that population is employed, matching the largest share since 2001.
- Wage growth also looks solid, with average hourly earnings rising 0.4% — and ticking up to 3.8% over the past year.
The big picture: This jobs report was the most highly anticipated in years because of what it was expected to suggest about how big the Fed's interest rate cut might be.
- The report does not neatly settle that question. On one hand, the unemployment rate didn't continue rising as it did in July, wages were solid and job growth remained squarely positive.
- But the revisions show weaker underlying job creation over the summer months, which might make the case for a larger half-point cut to try to arrest further labor market weakening.
New York Fed president John Williams, speaking shortly after the release of the jobs report, said it is now "appropriate to dial down" interest rates — but did not offer his view on the speed at which that should happen.
- Fed governor Christopher Waller, in a speech titled "The Time Has Come," signaled openness to a strategy of more aggressive rate cuts. "I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate," he said at the University of Notre Dame.
- "While I expect that these cuts will be done carefully as the economy and employment continue to grow, in the context of stable inflation, I stand ready to act promptly to support the economy as needed," he added.
Of note: Two-year U.S. Treasury securities were yielding 3.7% on Friday morning after falling precipitously in recent weeks. With the Fed's short-term policy rate now near 5.5%, that means markets are pricing in substantial rate cuts in the months ahead, regardless of how aggressively the central bank acts this month.
What's next: Major data looming before the Fed's decision includes Consumer Price Index, Producer Price Index and retail sales for August. But the Fed enters its customary blackout period after Friday, during which officials will refrain from speaking publicly about the economy and monetary policy decisions.
The bottom line: The open question facing the economy, and the Fed, is whether the jobs cooldown will remain only that — without conditions turning downright cold.
