US Employment Still Showing Signs of Weakness

The US dollar was really strong during most of August, with the dollar index DXY reversing from below 100 points and increasing around 5 points as markets were anticipating another rate hike from the FED in November. But, the USD has weakened against major currencies this week, as the DXY retreated 1.5 points lower. This has come from softer US data, particularly the employment figures which have shown that this sector is cooling off.

Yesterday the August unemployment rate and the non-farm payrolls report was released which gave the USD another push lower. In this report, it was revealed that the US added 187,000 new jobs, exceeding the expected figure of 170,000. However, the focus of the market suddenly turned on the unemployment rate, which jumped 3 points higher, from 3.5% to 3.8%. This marks the highest unemployment rate since February 2022.

Historically, when the US unemployment rate rises by 0.3% in a single month, it tends to continue on an upward trend. This suggests that there may be more challenges ahead in the job market, so the odds of the FED keeping the hawkish rhetoric or delivering another rate hike are declining further. However, one contributing factor to the rise in the unemployment rate was an increase in labor force participation. While this may seem positive on the surface, the Federal Reserve (the Fed) is likely to view it as an indication of slack in the labor market, especially when combined with the fact that earnings data also disappointed. Earnings were up by only 0.2% month-on-month, falling short of the expected 0.3% increase.

August US Employment Data and the Non-Farm Payrolls Report

• August non-farm payrolls +187K vs +170K expected
• July non-farm payrolls were +187K (revised to +157K)
• Two-month net revision -110K vs -49K prior
• Unemployment rate 3.8% vs 3.5% expected
• Prior unemployment rate 3.5%
• Participation rate 62.8% vs 62.6% prior
• U6 underemployment rate 7.1% vs 6.7% prior
• Average hourly earnings MoM +0.2% vs +0.3% expected
• Average hourly earnings YoY 4.3% vs +4.4% expected
• Average weekly hours 34.4 vs 34.3 expected
• Change in private payrolls +179K vs +150K expected
• Change in manufacturing payrolls +16K vs 0K expected
• Household survey +222K vs +268K prior
• Birth-death adjustment +103K vs +280K prior

The headline of the non-farm payrolls report indicates that job additions slightly exceeded expectations, but the most significant detail is the noticeable increase in the unemployment rate, which rose from 3.5% in July to 3.8% in August. However, it’s important to note that part of this increase can be attributed to a rise in the participation rate, which went up to 62.8% from 62.6%, so it’s not as bad as at first glance. This increase in participation suggests that more people are actively seeking employment, which can have both positive and negative implications.

Another concerning aspect is the trend in two-month net revisions. The data shows that the Bureau of Labor Statistics (BLS) has consistently revised down non-farm payrolls prints throughout the year. This downward trend in revisions may erode confidence in the accuracy of employment data and raise questions about the overall health of the job market.

Additionally, the fact that wage data came in slightly softer than expected indicates that there might be more room for the Federal Reserve (the FED) to consider a pause in its monetary policy adjustments. Softer wage growth can be seen as a sign of subdued inflationary pressures and may lead the Fed to take a more cautious approach in its interest rate decisions.