August Payrolls: Bouncing Back
August Payrolls: Bouncing Back
August payrolls growth was up relative to a downbeat July, but trends are slowing. The job-finding rate improved notably. Wage growth accelerated.
Today’s release of the August Employment Situation report confirmed that the downbeat July labor data were likely a one-off. Payrolls growth accelerated relative to July, but the underlying trends are slowing. The unemployment rate ticked down as the job-finding probability went up significantly, but wage growth accelerated again and remains elevated. For the Fed this data will confirm a moderate rate cutting pace is, for the moment, more appropriate than the aggressive cutting cycle that’s preferred by the market.
Key takeaways:
Payrolls growth picked up in August, but trends are slowing and are heading towards the breakeven pace needed to keep the unemployment rate constant at current levels.
The unemployment rate eased to 4.2% as the labor force participation rate remained unchanged at 62.7%.
The job-finding rate improved significantly over the month at 52% with smoothed trends also improving but still remaining below 50%. The unemployment rate consistent with recent job-separation and job-finding rates is now at a level where demand and supply of workers is more balanced. This suggests a near-term outlook for the official unemployment rate where this rate remains elevated.
Wage growth momentum in composition-adjusted average hourly earnings have picked up and remain elevated at a pace inconsistent with 2% inflation.
With the Fed’s recent switch to more emphasis on the employment side of its mandate relative to that for inflation, today’s data seems more in line with a gradual easing of the future policy rate path.
August Jobs Growth: Picking Up for the Month, Slowing Trend
The August jobs report released today indicated that payrolls in the establishment survey surprised to the downside as they were up by 142,000 persons in August, compared to an 89,000 increase in the preceding month (which was revised down from 114,000 initially). Payrolls growth for June and July combined were revised down 86,000 persons.
The unemployment rate dropped 0.1 percentage point to 4.2% in August. In three-digit terms the unemployment rate went down a lot less from 4.253% in July to 4.221%. Household employment grew faster in August: from +67,000 persons in June to +168,000 persons (chart above). Meanwhile, the labor force grew by 120,000 persons, less than a population growth of 212,000 persons in August but nonetheless the labor force participation rate remained at 62.7%.
Moving beyond the month-to-month movements, the chart above shows three- and six-month moving averages of payrolls changes from the establishment survey since January 2022. Smoothed trends in payrolls growth have slowed recently and are now approaching the 112,137 breakeven pace needed to keep the unemployment rate at 4.2% over the next 6 months (purple dashed line in the above chart). When naively incorporating the results of the Preliminary Benchmark revision published in August, as I did recently, makes this slowing less severe, however, and closer to a stabilizing labor market. It suggests the labor market might be settling into a steady state consistent with 4.2% unemployment.
Additional details about the underlying strength of the labor market can be inferred from the household employment survey. Following Shimer (AER, 2005), we can use data on total unemployed and employed persons as well as the number of people that are unemployed for less than 5 weeks to estimate:
Job-finding rate: the probability an unemployed person in month t will find a job or leaves the labor force. This is calculated assuming that total unemployment in month t+1 equals month t unemployment plus the number of people unemployed for less than 5 weeks in month t+1.1
Job-exit rate: the likelihood an employed person in month t will exit its job either due to layoffs, quits or retirement, which depends on data on the job-finding rate, unemployment and labor force.2
The chart above shows a plot for the estimated job-exit rate. This job-exit rate has been relatively stable over the past two years, with a moderate downward shift in the first half of 2023 that stabilized between June and October, but then rose again until recently, as layoffs and retirements picked up. Note, however, that the y-axis in the chart above also makes clear that the variability in the separation rate has been really modest.
Job exits jumped up between June and July and continued to move up between July and August (chart above). The June-to-July increase likely was driven by the jump in temporary layoffs in July, but with those having normalized in August the latest increase likely was more driven by retirements. The ratio of job exits is now approaching the levels seen in 2022.
In 2023 the job-finding rate declined a lot after Q1 2023 (chart above) but recovered since the summer, rising to about 54% on the month and 52% on a three-month average basis in December.
However, in 2024 the job-finding rate declined again and continued to do so until June going into July when it stabilized around a low 43%. In August the total number of unemployed persons declined over the month whereas the number of newly unemployed persons (less than 5 weeks in duration) increased: -48,000 vs. +117,000. This suggests that the likelihood to exit unemployment between July and August improved notably, with the job-finding rate increasing from about 43% to about 52% for July going into August (chart above). And no, this did not happen due to the reversal of the July jump in temporary layoffs in August, as the June-to-July job-finding rate essentially stayed flat back then despite this jump. Three- and six-month averaged job-finding rates for July also went up but remain below 50% around 47%-48%.
As in Shimer (AER, 2005) we can combine the above discussed job-exit and job-finding rates to calculate a flow-consistent unemployment rate and the chart above plots both the corresponding monthly rate and the three-month average of this rate. The (three-month average) flow-consistent unemployment rate is the unemployment rate that prevails when the job-exit and job-finding rates remain constant at their current (three-month average) levels. Deviations compared to the official unemployment rate should dissipate over time, and often leads changes in the official rate.
The chart above shows clearly that the significant improvement in the job-finding rate between July and August led to a drop in the monthly flow-consistent unemployment rate to a level not seen since the start of the year. This suggest there is some downside risk to outlook for the headline unemployment rate next month. Given the choppiness in this measure it’s probably more useful to look at three-month averages, and while these still are increasing, the pace of the increase are slowing down, which is a hopeful sign.
Since January the flow-consistent unemployment rate on a three-month average basis has been outpacing the official unemployment rate and leading the rise in the latter (chart above). It is largely driven by a deterioration in the job finding rate over that period, which reflects labor demand weakening. This is the mirror image of what happened in 2022.
Whether the recent cooling of the labor market is a prelude to the economy slipping into a recession or simply the labor market becoming more balanced is unclear. One way to look at this more quantitatively is to approximate that level of the unemployment rate at which the unemployment and job vacancy rates are equal on the Beveridge Curve. Michaillat and Saez (2024) show that this rate can be easily approximated by a geometric average of the unemployment and job vacancy rates.
The gray line in the chart above shows that on a three-month average basis this ‘balanced labor market” unemployment rate declined from about 5.3% in January 2022 towards a 4.3%-4.4% range more recently. That chart also makes clear that in particular the flow-consistent unemployment rate is converging on the ‘balanced labor market’ rate, suggesting some stabilization might be ahead for the fall.
With the pace of increase in flow-consistent unemployment rates easing, as the job-finding rate is recovering towards 50%, and trends in payrolls growth slowing towards a breakeven pace consistent with a 4.2% unemployment rate it appears the labor market is settling into new steady state with unemployment sitting just above 4%. The Fed will be pleased with that but will be assessing jobs data over the coming to see whether this “new normal” has indeed settled.
Wage Growth Accelerated
Average hourly earnings of all private sector employees grew faster over the month in August at 0.4% month/month from 0.2% in July and increased substantially in year/year terms from 2.9% in July to 3.8%. For production and non-supervisory workers, hourly earnings similarly picked up the pace from 0.3% month/month in July to 0.4%, and on a year/year basis growth accelerated from 3.4% to 4.1% in August.
The wage data from the jobs report are notoriously noisy, given that they are revised often and do not correct for the sectoral and skills composition of jobs growth over the month. There are better quality wage data available, such as the Atlanta Fed Wage Growth Tracker and the Employment Cost Index, but the Atlanta Fed does construct a rudimentary composition correction for average hourly earnings from the jobs report, which can be found here.
We can observe from the chart above is that the year/year wage growth rate indeed picked up in pace, despite the composition correction, and on a three-month basis wage growth eased only slightly and remains elevated at a pace not seen since the end of 2023.
I can combine labor productivity and labor share trend estimates with the 2% inflation target, along the lines I have done in my “Wages and Inflation Expectations” notes and incorporating the Q2 update of productivity data to get a medium-run annual wage growth rate consistent with 2% inflation. Additionally, instead of the 2% target one can use my “Main Street” year-ahead inflation expectations proxy, which after incorporating August inflation survey data suggests that the trend in near-term inflation expectations eased since Q2 to around 2.5% in year/year PCE inflation terms in August.
Compared to both the composition-adjusted AHE data for production and non-supervisory workers and the unsmoothed Atlanta Fed wage tracker into July3, annual wage growth still outpaces the 2.5% pace consistent with 2% PCE inflation in the medium term (green line in the above chart). In fact, sticky “Main Street” near-term inflation expectations seem to put a floor under wage growth above this target-consistent pace (blue line in the chart above).
September Rate Cut
At the Jackson Hole conference Chair Powell made clear the Fed no longer is singularly focused on bringing inflation back to 2% and is emphasizing more the employment side of its dual mandate given the cooling in the labor market. Today’s data will confirm for Fed officials that this indeed was the right change of emphasis. The underlying detail of the August jobs report suggests the labor market is cooling towards a structurally higher unemployment rate of just above 4%, but also is NOT imploding.
Given the lack of evidence of a sharply deteriorating labor market as well as wage growth that remains elevated at paces not consistent with 2% inflation over the medium term, which pose inflation risk later in the year or into 2025, the default view on the forthcoming Fed rate cutting cycle should be one of moderation.
As such I expect to see, starting at the September FOMC meeting, two to three 25bps rate cuts for the year, followed by 25bps rates every FOMC meeting in 2025 until the Fed funds rate is in the 3.25%-3.5% range. This is the range where I think most FOMC members will end up with their neutral rate views given recent developments across a variety of real R* proxies.
Given this calculation, the job-finding rate will run up to May utilizing data on (short-term) unemployment for June.
As the calculation of the job-separation rate depends also on (short-term) unemployment for May, we cannot go beyond April.
After suspending the production of the Wage Growth Tracker for many months owing to certain issues with household survey which serves as its source data, the Atlanta Fed recently resumed the publication of this important wage indicator in August.