August Jobs Report: 25bps vs. Question 50bps

By Seema Shah, Chief Global Strategist

The market response

August’s jobs report was a mixed bag and failed to resolve the recession debate that July’s jobs report had sparked. Nonfarm payrolls rose to 142,000 in August, but it was below consensus expectations, while the already weak July number was revised down to just 89,000. However, offsetting this disappointment was a drop in the unemployment rate and an increase in hours worked. The Fed is set to cut policy rates this month – but today’s labor data did not clear up the question of a 25 bps cut versus 50 bps.

Non-agricultural payrolls

Thousands, January 2022-present

Report details:

• Total nonfarm payrolls rose 142,000 in August, less than expected but a rebound from last month’s lackluster 114.00, which it was revised lower to 89,000. While August’s employment gain was in line with average job gains in recent months, it was a sharp decline from the strong monthly average gain of 202,000 over the past year.
• Job gains were most evident in construction and healthcare. The latter was responsible for a growing share of employment growth, although it saw a slowdown in job growth, with recent gains falling by about half of its average monthly pace over the past 12 months. Meanwhile, manufacturing and technology saw job losses.
• Unemployment fell to 4.2 percent, as expected, amid a reversal of temporary layoffs associated with summer auto plan retooling shutdowns and weather disruptions. With the number of permanent layoffs remaining essentially flat and average weekly hours increasing during the month, both point to signs that the economy is not yet shedding large numbers of workers.
• Average hourly earnings accelerated a stronger-than-expected 0.4% in the month, bringing the annual rate to 3.8%, up from 3.6% in the previous month. Earnings growth remained relatively robust despite rising labor supply, a sign that workers still have some bargaining power, with three-month annualized wage growth hovering around 3.8 percent.

Political perspective

Last month’s jobs report ignited recessionary debate, triggering steep stock market declines and raising expectations that the Fed will begin its rate-cutting cycle with a 50 basis point cut. Since then, the economic picture has been more ambiguous, with most investors looking to today’s jobs report to clarify the recession issue and the 25bps vs. 50 bps.

Unfortunately, aside from confirming that the labor market is cooling, today’s report provided very little clarity on the urgency of aggressive Fed action. In any case, it added evidence that so far the slack has come only from easing hiring activity, rather than from widespread layoffs. From this perspective, limiting to a 25bp cut at the September FOMC meeting may be the most sensible option.

What seems clearer, however, is that without glaring household or corporate balance sheet vulnerabilities, Fed easing should be enough to prevent recession—there doesn’t seem to be anything intrinsically broken that policy stimulus can’t fix.

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Editor’s note: The abstracts for this article were chosen by the editors of Seeking Alpha.