US economy added 142,000 jobs in August

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The US economy added 142,000 jobs in August and the unemployment rate ticked down to 4.2 per cent, leaving the Federal Reserve on track to lower interest rates this month.

The figures from the Bureau of Labor Statistics released on Friday came in below economists’ expectations for 165,000 new positions and surpassed the downwardly-revised 89,000 jobs created in July.

August’s jobs report is one of the most important economic releases ahead of the Federal Reserve’s next rate-setting meeting starting on September 17.

A month ago, the BLS reported that employment in July rose by just 114,000, which lifted the unemployment rate to 4.3 per cent and sparked concerns that the world’s largest economy was heading for a recession.

US stocks erased early gains on Friday and government bonds were slightly firmer following the release of the payrolls data.

The S&P 500 swung to be down 0.5 per cent in morning trading, while the Nasdaq Composite dropped 1 per cent.

The yield on the policy-sensitive two-year Treasury trimmed much of its earlier move to trade 0.04 percentage points lower at 3.71 per cent. The yield on the 10-year note was 0.01 percentage point lower at 3.72 per cent. Yields move inversely to prices.

Futures pricing indicated that traders were still betting on at least one quarter-point interest rate cut in September following Friday’s labour market data. However, the share of traders backing a half-point cut from the Fed also increased.

“All these fears about a sharp slowdown are not visible in the data. The market is overly worried about a recession, and this report shows that there is no sign of a recession,” Torsten Slok, Apollo Global Management chief economist, said.

“There is no need to go 50 when the unemployment rate is falling,” he continued, referring to the prospect of a 0.5 percentage point reduction in rates.

Fed officials are scrutinising the labour market for signs of weakness as they try to push inflation back down to the central bank’s 2 per cent target, which is based on the annual change in the personal consumption expenditures index. “Core” PCE, which strips out volatile food and energy prices and is closely watched by policymakers, was 2.6 per cent in August, compared with a peak of more than 5 per cent in 2022.

The increase in August payrolls was in line with the average pace of jobs growth in recent months but marked a slowdown from the monthly gain of 202,000 over the past 12 months, according to the BLS. Employment across the construction and healthcare sectors was strongest at 34,000 and 31,000 net additions, respectively. The manufacturing sector recorded job losses and growth was flat in those including retail, leisure and hospitality and professional and business services.

The BLS also revised down the pace of jobs growth in June, lowering its figure by 61,000 to 118,000 new jobs created. Combined, employment in June and July was 86,000 roles lower than previously reported, stoking concerns that the labour market started losing momentum earlier than thought.

For the month, average hourly earnings increased 0.4 per cent, translating to a 3.8 per cent year-on-year rise.

Progress on inflation and signs of a cooling labour market have left the Fed poised to lower interest rates for the first time since the pandemic hit the economy in 2020. The central bank has held rates at a 23-year high of 5.25-5 per cent since last July.

In prepared remarks released on Friday, John Williams of the Federal Reserve Bank of New York endorsed rate cuts, saying they were a “natural next step” as the central bank seeks to bring its policy rate back down to a more neutral setting that no longer crimps growth.

Fed chair Jay Powell said last month that the central bank did “not seek or welcome further cooling in labour market conditions” and would do “everything we can to support a strong labour market as we make further progress towards price stability”. Williams echoed this point in the moderated discussion that followed his Friday speech, while stressing that the economy remains on solid footing and that monetary policy was “well positioned” to keep it that way.

These comments come amid signs that the labour market is no longer the source of inflation that it was during a period of worker shortages that pushed up wages. Companies are now cutting job vacancies rather than laying off workers, with the number of openings now at its lowest since 2021, according to data released this week.

Williams forecast the unemployment rate to steady around 4.25 per cent this year as the economy expands as much as 2.5 per cent, indicating little concern about an impending recession.

David Kelly, chief global strategist at JPMorgan Asset Management, said he was not in favour of a larger cut to kick off the monetary policy easing cycle.

“I feel strongly that [the first cut] should be just 25 basis points. I think the Federal Reserve will unnerve everyone if they go 50 . . . For psychological reasons I think it’s much better that they just ease slowly.”