The employment report showed that the job market was mixed over the past few months, but up a bit for August.
- Nonfarm payrolls rose by 142,000, a rebound from a downwardly revised 89,000 in July. The last two months together were revised lower by 86,000 – a negative trend that mostly offsets the August pickup.
- Positively, however, average weekly hours worked rose a tad (up to 34.3), while average hourly earnings also moved higher (with a monthly gain of 4.0 percent).
The household survey was somewhat more optimistic than the payroll survey.
- The U-3 unemployment rate ticked down to 4.2 percent – no longer signaling a downturn according to the Sahm rule.
- The number of people who lost jobs (or completed temporary jobs) fell by 162,000.
- The number of people employed accelerated to a gain of 168,000.
Overall, today’s employment report continues to suggest that the economy is cooling rather than contracting – fitting in with much of the other recent economic data.
This is the second of three key economic reports that the FOMC will probably weigh heavily in its decision (with last week’s PCE inflation and next week’s CPI the other two). While overall a somewhat soft report, the Fed is likely to be pleased that even with the job vacancy rate declining (as seen in the JOLTS report), the number of unemployed workers isn’t rising by much (as shown by the Beveridge Curve).
The Fed is almost certain to ease monetary policy at the FOMC meeting in two weeks, the question is whether that cut will be 25 or 50 basis points. Financial markets (through the CME Group’s Fedwatch tool) barely look for a 50 bps move (55 percent to 45 percent for a 25 bps move). The Fed has another two FOMC meetings this year (and eight more next year), with much more economic and inflation data to be released before year-end. At this point, a 25 bps cut seems most likely to us, but we certainly can’t rule out a 50 bps cut in September (perhaps with a pause at the November meeting).
A cooler economy is what the Fed wants, in order to bring inflation down to its 2.0 percent long-term goal – but a downturn in the economy is a risk if the slowdown we are seeing now is more than a soft landing. The yield curve is flattening, and we expect it to turn positive next year as the Fed eases.
David W. Berson, Ph.D.
Chief US Economist
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