US Weekly Economic Commentary: Strong labor markets in August

Labor markets remained strong in August even as payrolls rose less than the average of prior months and the unemployment rate rose.

In August, nonfarm payrolls expanded by 315,000. While that is below some recent readings, it is far larger than what would be sufficient over time to absorb new entrants into the labor force.

Some might point to the increase in the unemployment rate in August, to 3.7%, as an early indication that labor markets are beginning to soften. In our view, such an interpretation would be premature. The rise in unemployment in August occurred amid outsized increases in both the civilian labor force and civilian employment, indications of ongoing robustness.

Our takeaway from the August employment report and other recent data on labor markets, including near-record job openings, is that labor demand is still very strong and labor markets are extraordinarily tight. We expect labor demand to moderate in coming quarters as firms adjust their workforces in response to sluggish growth in output.

'Growth recession'

The US economy continues to expand, though at a sluggish pace consistent with our expectation for a "growth recession" that will lead to a significant rise in unemployment over the next few years.

Fed Chair Jerome "Jay" Powell's Jackson Hole speech on Aug. 26 was intended to convey a strong determination to employ the tools of monetary policy, especially higher interest rates, to prevent high inflation from becoming entrenched and pushing up long-term inflation expectations.

Powell signaled interest rates will have to be raised considerably more to move policy into a restrictive stance while hinting that the target for the federal funds rate could rise close to 4%. The funds rate target would head even higher than indicated if inflation does not slow appreciably over the next several months.

A rate increase at the Federal Open Market Committee meeting concluding on Sept. 21 is a sure bet, with an increase of either 50 basis points ("large") or 75 basis points ("super-sized") in play pending subsequent data and developments. We think that 50 is more likely than 75 this month in part because of hints in July data that inflation is beginning to recede and consumer surveys pointing to some easing of inflation expectations as gasoline prices fall from recent highs.

Revisions to our third-quarter forecasts in the past week:

• GDP growth: We lowered our forecast of third-quarter GDP growth by 0.1 percentage point to 1.3%. The change primarily reflects data on state and local government employment that came in below expectations, implying lower government consumption expenditures.

This week's US economic releases:

• International trade (Sept. 7): We expect the July gap between the value of goods and services the U.S. sells overseas and what it buys to narrow to $69.6 billion from $79.6 billion in June, based on our processing of the advance report on trade in goods and our assumption for the services balance.

Posted 06 September 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and

Ben Herzon, US Economist, Insights and Analysis, S&P Global Market Intelligence and

Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.