Labor market slowing across the board

Bottom Line

Nonfarm payrolls rose by a much weaker-than-expected 142,000 jobs in August (consensus at 165,000, Federated Hermes at 134,000), with a combined downward revision of 86,000 in June and July. So, the adjusted August payroll represents a tepid gain of only 56,000 jobs. Moreover, the trailing 3-month average gain of only 116,000 is the slowest since the depths of the Covid recession in 2020.

The unemployment rate (U-3) slipped a tick to 4.2% in August, down from July's 3-year high at 4.3%. That's the second month in a row that it has triggered the dreaded Sahm Rule, which states that if U-3 rises 0.5 percentage points or more on a rolling 3-month basis within 12 months, the economy typically slows into a recession. In addition, the labor impairment rate (U-6), a broader measure of unemployment, rose to a 3-year high of 7.9% last month.

Huge downward adjustment None of today's sloppy data should surprise. In its annual benchmark revision last month, the Labor Department revised its nonfarm payroll count in the period from April 2023 through March 2024 down by a massive 818,000 jobs (an average monthly overstatement of more than 68,000 jobs), the largest downward revision since the Global Financial Crisis in 2009.

Inflation still a problem Wage inflation, however, has surprisingly re-accelerated, rising by a hotter-than-expected 0.4% month-over-month (m/m) in August (which annualizes to 4.8%) and by 3.8% year-over-year (y/y).

Manufacturing hires plummet The manufacturing sector lost 24,000 jobs in August (consensus at a loss of 2,000), the fourth time in the past seven months it has shed jobs. The ISM manufacturing index posted a weaker-than-expected 47.2 in August, marking the 21st out of the past 22 months below the 50 contraction level. But the risk of stagflation is growing, as the prices-paid component leapt to a higher-than-expected 54.0 in August (consensus at 52.0).

So, what's a Fed to do? We'll get a fresh update at the Federal Reserve's next policy-setting meeting on September 18. Its June 2024 Summary of Economic Projections forecasted U-3 to reach 4.2% by the end of 2025-precisely where we are now. That seems overly optimistic. We expect the Fed to emphasize the deterioration in the labor market more than it will inflation, the other part of its dual mandate, and cut interest rates by a quarter percentage point in two weeks.

Risk off for equity markets Stocks are overvalued, in our view, considering declining economic data, confusion regarding the Fed's monetary policy reaction function and uncertainty caused by the presidential election. Benchmark 10-year Treasury yields have plunged from 4.5% in early July to 3.7% today in a massive flight-to-safety rally. Meanwhile, the S&P 500 has declined by more than 4% from a record high on July 16, roughly midway through our expected 8-12% correction this summer and fall. The NASDAQ composite has declined by nearly 11% over this same time period, as the Magnificent Seven stocks begin to get their expected comeuppance.

Important labor-market indicators were weak:

• ADP private payroll survey August added a much weaker-than-expected 99,000 jobs (consensus at 145,000), the weakest month since January 2021 and down from a gain of 111,000 in July. Workers who changed jobs last month saw their wages rise around a 3-year low of 7.3% y/y (peak was 16.4% in June 2022). Job stayers also experienced their slowest wage growth in three years, with a modest increase of 4.8% y/y (peak was 7.8% in September 2022).
• Initial weekly jobless claims This high-frequency leading employment indicator declined to 227,000 for the week ended Aug. 31, down 9% from its 1-year high of 250,000 last month. Continuing claims slipped to 1.838 million for the week ended August 24, 2% lower than last month's cycle high of 1.871 million.
• Challenger, Gray & Christmas layoffs Employers announced that layoffs of 75,900 in August nearly tripled from a 1-year low of only 25,900 in July, though only marginally higher than a year ago. More than half of last month's layoff announcements were in technology, which hit their highest levels in 20 months.
• Job Openings & Labor Turnover Survey July job openings plummeted to their lowest level since January 2021, declining sequentially by 3% to a much weaker-than-expected 7.673 million (consensus at 8.1 million), 37% below a record 12.182 million job openings in March 2022. The rate of job openings plunged to a new nearly 4-year low of 4.6%, also significantly lower than a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker declined in July to a 3-year low of 1.1, down from a peak of 2.0 in March 2022.

Wage inflation and hours worked rise Average hourly earnings surged by a hotter-than-expected 0.4% m/m in August (consensus at 0.3%), which annualizes to a torrid 4.8%, and by 3.8% y/y (consensus at 3.7%), up from a 3-year low of 3.6% y/y in July. The Fed is targeting a 3% gain. Average weekly hours worked ticked up to 34.3 in August, up from a 6-month low of 34.2 in July. Each change of 0.1-hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before they downsize staff.

More immigrants are working More than 10 million people have streamed across the southern U.S. border over the past four years. Many of them have taken jobs here, either officially or as part of the underground economy. As a result, the number of foreign-born workers (aged 16 years and over) has increased by 1.24 million over the past year (a 4.1% bump), leading to a worker participation rate of 67.6%. But the number of native-born workers has decreased by more than 1.3 million over the past year (a decline of 1.0%), with a much smaller participation rate at 61.7%. This mix shift is likely mitigating wage inflation overall.

Unemployment rate declines, labor impairment rises and participation rate is flat Household employment (an important leading employment indicator) added 168,000 jobs in August, up from 67,000 in July, 116,000 in June and a loss of 408,000 in May. The number of unemployed people declined by 48,000 in August, compared with increases of 352,000 in July, 162,000 in June and 157,000 in May. So, U-3 declined to 4.2% in August, versus a 3-year high of 4.3% in July, 4.1% in June and April 2023's 53-year low of 3.4%. U-6 also soared to new a 3-year high of 7.9% in August, up from 7.8% in July, 7.4% in each of the three previous months and well above the cycle low (dating back to 1994) of 6.5% in December 2022.

The civilian labor force rose by 120,000 in August, down from gains of 420,000 workers in July and 277,000 workers in June, and a loss of 250,000 workers in May. The participation rate was unchanged at 62.7% in August, up from 62.6% in June and 62.5% in May. That's just under a post-pandemic high of 62.8% in November 2023, while the pre-pandemic cycle high was 63.3% in February 2020.

K-shaped recovery gap widens The unemployment rate for highly educated workers rose to 2.5% in August, up from 2.3% in July and September 2022's cycle low of 1.8%. But that figure for less-educated workers surged to 7.1% in August, up from 6.7% in July, 5.9% in June and the 31-year low of 4.4% in November 2022.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 3,000 jobs in August, 18,000 (up from a preliminary 9,000) in July and 30,0000 in June. That's the 18th time out of the past 19 months this sector has declined.
• Manufacturing cratered in August, shedding a much worse-than-expected 24,000 jobs (consensus at a loss of 2,000), compared with a better-than-expected gain of 6,000 in July and a worse-than-expected loss of 16,000 in June. This sector has lost jobs in four of the past seven months.
• Construction gained strength, adding 34,000 jobs in August, 13,000 in July, 18,000 in June and 13,000 in May.
• Retail was down for the third consecutive month, losing 11,000 jobs in August, 3,000 in July, and 20,000 in June, as we're deep into the important Back-to-School season, which we expect will be soft.
• Leisure & hospitality rebounded with the addition of 46,000 jobs in August, 24,000 in July, 4,000 in June, and 18,000 in May.

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