The US jobs market served up a nasty surprise in the first week of September, as the August employment situation report came in tepid. What’s more, non-farm payrolls rose by a paltry 22,000 — well below the 75,000 that economists expected. Yet this disappointing figure serves as a harbinger of even more difficult times approaching for our economy. In fact, it has already ignited speculation over an interest rate cut from the Federal Reserve at its next meeting in September.
In August, the unemployment rate jumped to 4.3%. This represented a breakout above the range it had been stuck in for the last 15 months. This increase represents a return to rates last seen during the early post-COVID recovery period in 2021. This unprecedented spike in unemployment casts strong doubt on the overall wellbeing of the labor market. Moreover, both the average weekly hours and the year-over-year change in hourly earnings missed the mark.
Economists had been looking for average weekly hours worked to come in at consensus highs. To compound this positive news, year-over-year hourly earnings missed the mark. This confluence of factors is indicative of a broader economic slowdown, resulting in the Federal Reserve reassessing the path forward for monetary policy.
Federal Reserve Chair Jerome Powell’s recent comments become even more telling. As recently as July 30, during a Federal Open Market Committee (FOMC) meeting, he characterized the labor market as “solid.” By August 22, he was giving a tough-love speech at Jackson Hole. His tone markedly changed, laying bare his deepening fears over the stability of the labor market.
Economists John Davies and Steve Englander, also of Standard Chartered, put a fine point on what everybody is feeling about the dramatic reversal in the mood. They stated,
“From ‘solid’ to soft in less than six weeks.”
This change in the economic landscape has fueled bets on the prospect of a potential rate cut. The August labor market data teamed up with falling inflation expectations to present a moment for a possible “catch-up” rate cut. This would imply a 50 bps cut at the September FOMC meeting. This expected move would mirror the action the Fed took at about this time last year. Then, the economic landscape called for bold action.
The three-month moving non-farm payroll average is now at just 29,000—an indication of how much the labor market has faltered the past few months. Now, policymakers are determining the best way forward. Finally, they’ll be looking over some preliminary edits of employment data for April 2024 to March 2025, for which a draft release is scheduled for next week.
Davies and Englander emphasized the implications of these upcoming revisions, stating that they expect them to support their call for a 50 bps rate cut:
“The US labor-market report for August was softer than expected. Headline non-farm payrolls rose just 22k, versus the 75k consensus. Average weekly hours and y/y hourly earnings were also below consensus, and the unemployment rate rose to 4.3%, breaking above its range of the last 15 months to a level last seen during the post-COVID recovery in 2021. While Fed Chair Powell was still describing the labor market as ‘solid’ as recently as the 30 July FOMC, his stance had clearly changed by his Jackson Hole speech on 22 August. We think the August labor-market data has opened the door to a ‘catch-up’ 50bps rate cut at the September FOMC meeting, just as it did this time last year (we previously expected a 25bps cut).”
In Washington, the Federal Reserve is preparing for their next FOMC meeting. All of us are waiting to see how these new labor market realities will influence their decision making. A possible rate cut has huge stakes involved. It can be a signal of larger trends in monetary policy and an early glimpse of how the Fed is adapting to a changing economic landscape.