US jobs data raises hope for a moderate scenario as the economy slows

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The US labor market cooled in August, raising hopes that the Federal Reserve will succeed in orchestrating a soft landing for the world’s largest economy.

Investors hailed a potentially mild scenario in which inflation is brought under control without triggering a recession, as Friday’s figures revealed a slight rise in the unemployment rate, weak job growth and wages rising again at pre-Covid rates.

“If the Fed could have put together the perfect employment report, it would look like it does today,” said Andrew Hollenhorst, an economist at Citi.

But he added: “We have to be careful to look at one month’s data and say we’re all in the clear.”

The vast majority of investors already expected the central bank to keep interest rates steady at its next meeting in late September.

But following the release of the data on Friday, futures markets cut the odds of a rate hike at the subsequent November meeting from just under 50 per cent to below 40 per cent.

Investors and policymakers are closely monitoring any signs that the US labor market is slowing, as jobs and wage growth are major factors contributing to inflation.

In comments responding to Friday’s numbers, US President Joe Biden responded to “experts” who argued that a sharper contraction was needed to control rising prices.

Instead, he said his administration had managed “months of reducing inflation while simultaneously adding jobs and increasing wages.”

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Unemployment rose to 3.8 percent last month, Bureau of Labor Statistics data showed, compared with economists’ expectations that it would remain steady at a multi-decade low of 3.5 percent.

Monthly wage growth of 0.2 percent was also lower than expected, although the 4.3 percent annual growth rate remained well above levels considered consistent with the Fed’s 2 percent inflation target.

The economy created 187,000 new nonfarm jobs in August — above expectations of 170,000 but for the third straight month below the 200,000 mark.

The previous two-month total was also revised to a cumulative decrease of 110,000.

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Wage and unemployment trends have helped bring more people back into the workforce, with the first increase in the labor force participation rate since February. Such an increase in labor supply may also slow down the rise in wages.

Jack Janasiewicz, Natixis portfolio manager, said that as people continue to be “moved off the margins and into the jobs market”, this will “put downward pressure on wages overall”.

Friday’s figures followed separate data published this week that also indicated a decline in labor demand, with the number of job vacancies falling more than expected.

“The report shows that the labor market is rebalancing in a good way – increases in labor force participation are what we want to see,” said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.

“A rate hike in September is now highly unlikely, but it is too early to say that all rate hikes are off the table.”

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But other economists expressed concerns that the Fed will pressure the economy too much.

“The odds of a hard landing continue to grow as long as the Fed continues to talk about the possibility of raising interest rates,” said Priya Misra, portfolio manager at JP Morgan Asset Management.

“Just keeping their options alive means real interest rates will remain constrained,” she added, referring to the impact of expectations on real borrowing costs.

In his annual speech at the Federal Reserve’s Economic Symposium in Jackson Hole, Wyoming, last week, Fed Chair Jay Powell stressed that the central bank is “willing to raise interest rates further if appropriate,” but said policymakers would be careful as they tried. Achieving balance in controlling inflation. while minimizing damage to the broader economy.

Stock and bond prices initially rose after the data was released, but gave up early gains. The S&P 500, which fell into negative territory at midday, closed up 0.2 percent.

Additional reporting by Jennifer Hughes in New York

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