Slower, But Still Strong U.S. Job Growth Expected In August

U.S. employers likely continued to hire workers at a strong clip in August while steadily raising wages, signs of persistent labor market strength that could encourage the Federal Reserve to deliver a third 75 basis point interest rate hike this month.

The Labor Department's closely watched employment report on Friday would come a week after Fed Chair Jerome Powell warned Americans of a painful period of slow economic growth and possibly rising unemployment as the U.S. central bank aggressively tightens monetary policy to quell inflation.

The anticipated solid job growth last month would be further evidence the economy continues to expand even as gross domestic product contracted in the first half of the year. It is also a sign the Fed still needs to cool the labor market despite the front loading of rate hikes.

"If we're still talking about job growth of 300,000, and an unemployment rate of around three-and-a-half, or 3.6%, I think the Fed really thinks that the labor market can absorb more aggressive tightening," said Will Compernolle, a senior economist at FHN Financial in New York. "We're pretty far from any pain as far as the labor market is concerned."

Nonfarm payrolls likely increased by 300,000 jobs last month after surging 528,000 in July, according to a Reuters survey of economists. That would mark the 20th straight month of job growth. While that would be the smallest increase in 16 months, it would still be way above the pre-pandemic average.

Estimates for payrolls growth ranged from as low as 75,000 to as high 450,000. The unemployment rate was forecast unchanged at a pre-pandemic low of 3.5%.

Despite the uncertain economic outlook, demand for labor remains strong. There were 11.2 million job openings on the last day of July, with two job openings for every unemployed person.

First-time applications for unemployment benefits remain low and the Institute for Supply Management's measure of factory employment rebounded in August after three straight monthly declines. Comments from factories surveyed by ISM showed they "continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition."

WORKER HOARDING

But the response rate to the Labor Department's establishment survey, from which the nonfarm payrolls count is derived, has historically tended to be low in August, resulting in initial job gains arriving below expectations.

"Over the past five years the average upward revision between the first and third estimates is nearly 120,000," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"Another factor is that July job growth got juiced by an additional week between payroll reference periods. Therefore, some hiring that would normally have occurred in late July or early August may have been pulled forward."

The government surveys businesses for payrolls during the week that includes the 12th of the month. The Fed has twice raised its policy rate by three-quarters of a percentage point, in June and July. Since March, it has lifted that rate from near zero to its current range of 2.25% to 2.50%.

Financial markets are pricing a roughly 78% probability of a 75 basis point increase at the Fed's Sept. 20-21 policy meeting. August consumer price data due mid-month will also be a major factor in determining the next rate increase.

The labor market has continued to charge ahead, with economists attributing the resilience to businesses hoarding workers after experiencing difficulties in the past year as the pandemic forced some people out of the workforce in part because of prolonged illness caused by the disease.

There is also pent-up demand for workers in service industries like restaurants and airlines. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, remains 1.3 percentage points below its pre-pandemic level.

Other economists said while layoffs by major companies were getting media attention, small companies were hiring. They also argued strong hiring in the services sector, which was hugely affected by the pandemic, was needed to fight inflation.

"We're still catching up and this is where I am completely a contrarian," said Brian Bethune, an economics professor at Boston College. "The more people that businesses can hire, the more services they can provide, which means more production and that will reduce inflation. That's what is critical now."

Falling commodity prices have slowed the pace of inflation, with the annual consumer price index rising 8.5% in August. But rising wages are likely to keep inflation elevated for a while.

Average hourly earnings are forecast rising 0.4% after a solid 0.5% increase in July. That would lift the annual increase in wages to 5.3% from 5.2% in July. Strong wage gains are keeping the income side of the economic growth ledger expanding, though at a moderate pace, and a recession at bay for now.

"If there is a recession, it's going to be mild," said Christopher Kayes, a professor of management at the George Washington University School of Business in Washington. "It will be a recession with almost full employment. We haven't seen that in our lifetime."