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'What the inflation doctor ordered': Economists react to a cooler August jobs report

·8 min read

The U.S. economy added 315,000 jobs in August as the unemployment rate rose to 3.7%.

Although the labor market remained strong last month, job growth cooled from July – a sign to investors that the Federal Reserve’s efforts to rein in inflation are starting to take effect.

The labor force participation rate notably inched up in August to 62.4% from 62.1% the prior month, matching the highest level since March 2020. Meanwhile, wage gains slightly retreated, rising 0.3% and 5.2% over last month and last year, respectively.

Unusual tightness in the labor market has been closely-watched by central bank officials, with the imbalance between job openings and available workers placing upward pressure on wages and adding to inflationary pressures.

And the government’s August data suggested the labor conditions are moving in the right direction.

A flurry of reactions from Wall Street hit in our inboxes following Friday's release, and Yahoo Finance rounded up some of what we got below:

Sarah House and Michael Pugliese, Economists, Wells Fargo

“August's jobs report was weaker in the best way possible as far as the Fed is concerned, and may be just what the inflation doctor ordered. Today's data in isolation tilt the scales toward a 50 bps hike at the FOMC's September meeting, but does not on its own settle the matter. While the August jobs report keeps hope alive that the Fed may be able to pull off the elusive soft-landing, there remains significant work ahead in quelling the inflation pressures coming from the labor market.”

Ian Shepherdson, Chief Economist, Pantheon Macroeconomics

“The Fed will be relieved to see the 0.26pp increase in the participation rate - big enough to be statistically significant, unusually — reversing the declines of the previous two months. The medium-term upward trend is still in place, we think, after the Q1 overshoot and Q2 correction. This is hugely important, because a sustained slowing in wage growth from the recent unsustainable pace is hard to imagine without a further increase in participation. The labor force reportedly rose by nearly 800K in August, swamping the 442K increase in household employment — the biggest since March, so much for the 'household employment is rolling over' crowd — and pushing up the unemployment rate to 3.7%. These monthly changes are all statistically significant, but they could easily correct in September.”

Nancy Vanden Houten, Lead US Economist; Kathy Bostjancic, Chief US Economist, Oxford Economics

“We expect a marked moderation in job growth in coming months as economic activity is weighed down by higher interest rates and weakness in overseas economies. However, as the June JOLTS data highlighted, labor shortages remain acute and bringing worker demand and supply closer into better balance will be a gradual process. The modest slowdown in employment growth in August may be welcome by the Fed, but it won't prevent further sizable rate hikes in the months ahead. Fed Chair Powell made clear last week that the FOMC plans to push rates well into restrictive territory to bring down inflation and prevent an unmooring of inflation expectations.”

Chris Larkin, Managing Director of Trading, Morgan Stanley’s E*TRADE

“This morning’s data comes as the market finds itself at a notable inflection point — roughly 50% from the height of its July rally. With this in mind traders may be seeing what they want to see as it’s a strong read, but it also includes a rise in unemployment, which translates into a softening labor market in which the Fed slows its rate hike campaign. So we’re seeing some positive movement in the market today, but keep in mind we also seem headed for a third down week in a row to start September. And although September has been slightly less bearish over the past three decades, it has hardly transformed into the type of month that bulls look forward to.”

NEW YORK, NEW YORK - SEPTEMBER 01: Traders work on the floor of the New York Stock Exchange (NYSE) on September 01, 2022 in New York City. Stocks rose in late afternoon trading on the first day of September as investors looked forward to the jobs report Friday. (Photo by Spencer Platt/Getty Images)
NEW YORK, NEW YORK - SEPTEMBER 01: Traders work on the floor of the New York Stock Exchange (NYSE) on September 01, 2022 in New York City. Stocks rose in late afternoon trading on the first day of September as investors looked forward to the jobs report Friday. (Photo by Spencer Platt/Getty Images)

Dr. Lisa Sturtevant, Chief Economist, Bright MLS

“The Fed had been hoping to see a slower pace of job growth after the very strong July jobs report. The downtick in employment growth in August may be a sign that the Federal Reserve’s policies are starting to have an impact. The Fed will be watching other economic data as the labor market news provides some conflicting signals. The Fed will certainly raise rates again later this month, probably by another three-quarters of a percentage point.”

Gregory Daco, Chief Economist, EY Parthenon

“The latest bounce is a welcome development, indicating that cyclical tailwinds are still strong enough to offset the structural drag from an aging population.”

“While US businesses remain optimistic about the outlook and corporate finances are generally healthy, elevated uncertainty regarding the trajectory of final demand, persistent inflation, market volatility and rising interest rates will lead to more conservative hiring and investment decisions. The Fed will likely slow the pace of policy tightening in September with a 50bps increase, barring a surprisingly strong CPI print.”

Jeffrey Roach, Chief Economist for LPL Financial

“The labor market is moving in the right direction for policy makers. An uptick in unemployment along with a modest increase in the participation rate means that the labor market in August is less tight than it was in July. The market will like the broad-based gains in jobs as both goods-producing and services jobs rose in August. One caution flag waving right now is the rise in part-time workers who otherwise would be interested in full-time work. The economy is now employing more workers in temporary help services than ever before and this could be a cause for concern. Overall, this is a good report for those concerned about inflationary impacts of a tight labor market.”

Quincy Krosby, Chief Global Strategist, LPL Financial

“Helping the Fed's campaign to curtail inflation is that considerably more workers are coming back into the labor market, giving employers a broader market for hiring and helping wages remain stable. Pressures in the labor market, if workers continue to enter, should ease wage pressures. While this is just one data point – indeed pointing in the right direction – it could lead to a more normal labor market with wages pressures easing for employers.”

Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington, DC, on July 27, 2022. - The US Federal Reserve on July 27 again raised the benchmark interest rate by three-quarters of a percentage point in its ongoing battle to tamp down raging price pressures that are squeezing American families. (Photo by MANDEL NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)
Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington, DC, on July 27, 2022. - The US Federal Reserve on July 27 again raised the benchmark interest rate by three-quarters of a percentage point in its ongoing battle to tamp down raging price pressures that are squeezing American families. (Photo by MANDEL NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)

Jack Janasiewicz, Lead Portfolio Strategist, Natixis Investment Managers Solutions

“The big jump in the labor force and labor force participation rate takes the heat off of the uptick in the unemployment rate as more people entered the workforce as opposed to those getting laid off. Of note, gains in the manufacturing and construction segments of the economy, areas of the economy that are more cyclically and rates sensitive, were strong, demonstrating a still healthy cushion for growth in the face of a slowing backdrop. On balance, a supportive report but it's doubtful that this changes the trajectory of the Fed.”

Jamie Cox, Managing Partner, Harris Financial Group

"Unemployment rose because the labor market wasn’t able to absorb all of the people returning to workforce. And, wage growth finally slowed down. These are the best sign so far that a soft landing remains possible."

Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance

“The Fed is somewhat on autopilot for the near future — they will be hiking rates no matter what — but to the extent that the economic data comes in like this, it could take some pressure off of them in future meetings, to at least slow the pace of their rate hikes or achieve a level of rates which allows them to pause sooner. The market is in a bad place in general — rising interest rates and too high inflation — but this is actually pretty good economic news and should be well received by the stock market today.”

Callie Cox, U.S. Investment Analyst, eToro

“The job market is moving in the right direction for the Fed. Unfortunately, for Americans, that means it’s weakening. The unemployment rate rose the most since early 2020 as layoffs started to show up in the data, and hiring has noticeably slowed. The trend in the job market may matter more than the actual number to markets. However, these numbers still look too hot in the context of unusually high inflation. They’re definitely not enough for the Fed to consider its job done. In the past, the Fed has eyed 4% annual wage growth as the yardstick for an overheating economy. Right now, wages are still growing near 6%. It’s great news for your paycheck, but it’s also a big driver of this rampant inflation we’re experiencing.”

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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