- Weaker than expected nonfarm payrolls (+142K) unlikely to represent a trend. We expect strong job growth in the coming months.
- Unemployment rate edges down to 6.1% with some improvement in long-term unemployment.
Job growth slows in August…
Job growth slowed in August. Nonfarm payrolls increased by only 142K, following downward revisions in the past two months of -28K. This was well below the consensus forecast (230K). This is the weakest pace after seven months of an average job growth of 216K. Job gains were spread across most activities, but their pace declined compared to previous months. Only manufacturing added no jobs, while jobs in retail trade fell (-8K). Meanwhile, the unemployment rate in the household survey edged down to 6.1% in August from 6.2% the previous month. Other indicators which are being followed closely from this report showed a modest improvement. The number of long-term unemployed, declined by 192K, while those employed part time for economic reasons was little changed. Meanwhile the participation rate, which shows the share of working-age people in the labour force decreased 0.1 percentage points to 62.8%.
…but is at odds with recent data
The latest snapshot of the labour market is at odds with recent signs that the US economy was on firmer footing. Growth rebounded in the second quarter to 4.2% and data going into the third quarter has been strong. The ISM manufacturing index has been steadily increasing since January, while the non-manufacturing index continued to trend up, bringing the composite index to 59.7, a level which is broadly consistent with GDP growth of around 4%. Meanwhile, consumer confidence is improving and hit a seven year high in August.
We think that this is a transitory slowdown and we expect a rebound in the coming months. We are forecasting a scenario in which growth remains strong as a result of increasing investment, which will require companies to hire to keep up with the pace of economic activity. Moreover, the composition of demand for labour continues to favour professional services (+47K), jobs the health sectors (+34K) and construction (20K). This suggests that businesses continue to be positive about the outlook, since hiring in these sectors is usually a sign that the recovery is firming.
The labour market data comes ahead of a Fed policy meeting on September 16-17. In the past months the stronger nonfarm payrolls reports and the fall in unemployment numbers resulted in a more nuanced tone from the more cautious members, including the Chair of the Fed. Some FOMC members even judge that the progress already achieved in the labour market as “sufficient “to warrant a change in policy”. However, when voting during the last FOMC meeting in June, most members of the Committee continued to support keeping low rates, or “below what is considered normal”. Some members are still concerned about the sluggish wage growth and more broad labour market indicators, including the still elevated numbers of part-time workers that want to work full time at 7.3 million.
All in all, we think that the recovery in the labour market is going through a blip. Therefore the weaker than expected number should not influence the Fed’s view on the labour market. We expect the economy to continue to grow above trend, which is consistent with a strengthening of job growth.