EconomicsFed Policy

August unemployment jumps to 3.8% as labor cools

But non-residential construction hit a record high

The pace of hiring continued to cool in August, with job gains of 187,000, which is lower than both the 204,000 monthly average for the previous six months and the 399,000 average of 2022, said Realtor.com Chief Economist Danielle Hale.

Total nonfarm payroll employment increased by 187,000 jobs, just like in July, according to data released by the Bureau of Labor Statistics. Additionally, revised job numbers for July indicated that employment growth was slower last month than originally reported. 

Unemployment in August continued to hover near recent lows, rising to 3.8% from 3.5% in July. It is a low rate by historical standards, but is at its highest level since February 2022. The total number of unemployed persons climbed to 6.4 million.

“The jump in the unemployment rate to 3.8% was caused by an increase in the labor force participation rate. More people are actively looking for work, but new or re-entrants to the labor market in August were not having much luck, pushing up the numbers of those unemployed for less than five weeks,” said Mike Fratantoni, MBA senior vice president and chief economist.

However, there are still many more job openings than unemployed individuals, he added.

The lion’s share of the job growth in August came from gains in health care (+71,000), leisure and hospitality (+40,000) and social assistance(+26,000), according to the report.

Employment in the construction industry continued to trend up in August, adding 22,000 jobs,  in line with the average monthly gain over the prior 12 months (+17,000). Within the industry, employment continued to trend up over the month, especially for trade contractors (+11,000) and in heavy and civil engineering construction (+7,000).

Furthermore, residential building construction employment increased by 2,400 jobs, according to First American Deputy Chief Economist Odeta Kushi. While non-residential increased by 1,800 — a record high.

In such an environment, builders are cautiously optimistic as we saw with the builder’s confidence  declining for the first time in 2023 in August.  Demand remains steady in the housing market but with stubborn elevated mortgage rates, consumers are feeling the pinch of declining affordability, said Kushi. 

Inflation ticked up in July and the employment situation, while softening, remained stable. Meanwhile, households still have significant savings, which places them in a favorable financial position to keep on spending.

Wage growth slowed a bit in August to 4.3% on an annual basis, said Fratantoni. Also, average hourly earnings ticked up by 0.2% in August and up 4.3% from a year earlier, which is in line with expectations.

However, while wage growth and job openings are slowing, employers are not cutting jobs in big numbers and the labor market remains tight, noted Bright MLS Chief Economist Lisa Sturtevant. While the cooling of the job market is not a threat to workers, new macroeconomic trends will make consumers more cautious, she added.

“That caution—coupled with mortgage rates above 7%—will lead to a cooler housing market this fall,” said Sturtevant.

What will the Fed do ?

During its last meeting in July, the Federal Reserve said it would remain very attentive to incoming economic data ahead of the September meeting of the Federal Open Market Committee. Economists have diverging opinions on what might happen later this month.

According to Sturtevant, a rate hike is expected in September.

“A rate hike is expected when the Fed meets later this month” said Sturtevant.  “Though we’ll have to wait for more economic data this fall to know if the Fed will take a pause on rate increases in November.”

On the other hand, Fratantoni and Hale were more optimistic. Fratantoni thinks that this report should be enough for the Fed to keep the federal funds target rate on hold at its next meeting. 

“We expect that they will hold here until next spring, and their next move should be cut. The combination of a still strong job market, and rates that should trend down over time, is positive for the housing market,” he said.

While another rate hike before the end of 2023 is not off the table, according to Hale, she doesn’t expect it to happen in September.

“Based on data before the jobs report, the market was not anticipating a hike in September, and I don’t expect that to change. Another hike before year-end isn’t off the table, but isn’t my base case,” she said.

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