If you’ve ever suffered through an economics course in school, you’re probably familiar with the Phillips Curve. It is the idea that inflation and unemployment usually have an inverse relationship. As unemployment falls and the economy expands, inflation tends to rise as there is growth within the economy and strong discretionary spending. Then, as economic growth slows and inflation drops, unemployment ticks up as firms slow hiring to adjust to demand within the economy. But we live in unusual times. After a year and a half of sharply increasing interest rates, helping inflation drop from a peak of 9% down into the 3% range, the labor report for August highlighted the resilience of the U.S. economy. There were 187,000 jobs added, surpassing the consensus estimate of 170,000; this is quite a feat, marking the 32nd consecutive month of job gains.
Unemployment and Wage Gains
With jobs being added to the economy, it would make sense that the unemployment rate came down. The world we live in today however doesn’t make much sense very often. Despite these job gains, unemployment climbed from a historically low 3.5% to 3.8%. How did this happen? The answer lies in the labor force participation rate: how many working-aged people are actively seeking employment. That number climbed by over 700,000 in August, bringing the labor force participation rate from 62.6% to 62.8%, which is still below its pre-pandemic level of 63.3% in February of 2020, but well above its pandemic trough of 60.1% in April 2020. Like the employment figure, the strong reading for August was accompanied by downward revisions to previous months, though again, those revisions were not enough to bring any numbers into the negatives. A stronger labor force participation rate is good for the fight against inflation, as it helps to ease some of the hiring pressures faced by employers in recent years by expanding the labor pool which should, in theory, slow the growth rate in annual average earnings.
Speaking of average earnings, chances are if you found a new job in the last year, you’re making more money. Adding to the case of a strong but normalizing labor market, average annual earnings growth came in positive, at 4.3% year over year and 0.2% month over month. These numbers are both down from where they were in July but are still comfortably positive and, perhaps more importantly, greater than the inflation rate. This is an especially positive data point, as it bodes well for both consumers, in that they are making more money in real terms, and the Federal Reserve in their fight against inflation, in that wage growth is slowing.
Where the Jobs Were (and Weren’t) Found
So, where were these jobs found? Service-based sectors accounted for the bulk of job creation in August, with 143,000 coming from this area of the economy. Of those, 99% were from the subsectors of education and healthcare, and leisure and hospitality. These subsectors accounted for 75% of total job growth in the month. On the goods side of the equation, construction and manufacturing led the way. The jobs weren’t found in the transportation, warehousing, and entertainment sectors. The bankruptcy of less-than-truckload freight carrier Yellow held back transportation and warehousing, and the Screen Actors Guild – American Federation of Television and Radio Artists (SAG AFTRA) strike held back entertainment. Excluding trucking and motion picture job losses due to these extraordinary circumstances, Santander U.S. Capital Markets estimates job growth was really closer to 240,000 in August.
While there have been almost three years of job gains without a single month of losses, it is important to note that the August report also brought downward revisions to prior months. Revisions to June and July combined for a reduction of 110,000 jobs between the two months but still left them both in positive territory.
What Does This Say About the Broader Economy?
Overall, the August jobs report was positive all around. Gains in job growth and wages are positive for consumers as people are making more money in real terms, and it shows that job opportunities are still plentiful for job seekers. Advances in the labor force participation rate and numbers that were positive across the board but slowing is good news for employers and the Fed as it should help to reduce pricing pressures going forward. Putting these pieces together paints a picture of a resilient economy in the face of declining, yet still elevated, inflation. This may prompt the Federal Reserve to hold interest rates higher for longer than previously forecast but may imply that we are very near, if not at the end of the current rate hiking cycle. Further, with strong labor gains and inflation well off its peak, there is optimism among economists that a so-called soft landing of the economy, bringing inflation back to its target rate of 2% without inducing a recession, is becoming increasingly likely.
Written by: Brian Sawyer