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Labor Market Finally Doing What the Fed Wants

September 6, 2023

At first glance, August’s 187,000 job additions looked like a headache for the Fed. The number was higher than expectations for 170,000 and June’s 105,000 nonfarm payrolls, which were the lowest since December 2020.


But one month’s payroll number can’t be judged in isolation. Overall, recent jobs data show this year’s red-hot labor market is cooling, but not collapsing under the weight of rate hikes.


August’s payroll is still 100,000 below the average monthly jobs number from January through May, before payrolls first fell below 200,000 in June. While payrolls grew last month, a combined 110,000 jobs were shaved off June and July’s initial readings, and every payroll number has been revised down this year. The same could hold true for August.


Aside from jobs growth, everything else in August’s employment report pointed to a cooling labor market, including unemployment rising to 3.8% from July’s 3.5%, and further moderation of wage growth.


Job openings have also weakened 21% year-to-date and fell to 8.8 million in July, versus an expected 9.5 million. There are now 1.5 job vacancies per applicant, down from 2.0 at the beginning of the year.


Paired with falling inflation, this is exactly what the Fed wants for a soft landing. Nonetheless, policymakers have more work to do since payrolls are still too strong and inflation remains above its 2% target. 




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