The U.S. labor market delivered a major upside surprise in August, with employers adding 162,000 jobs and strongly exceeding Wall Street forecasts. The stronger-than-expected rebound challenged recent signs of sluggish hiring and immediately renewed expectations for another Federal Reserve interest rate hike.
The unemployment rate held steady at 4.1%, even as more Americans entered the labor force. August’s gain was also far stronger than the average of just 31,000 jobs added per month over the previous year, suggesting the labor market regained meaningful momentum following a weak start to the summer.
Hiring Rebounds After a Weak July
August’s 162,000 payroll gain represented a dramatic improvement from July, which was revised from an initially reported loss of 23,000 jobs to a gain of 21,000. June was also revised higher, bringing the combined upward revision for the two months to 55,000 jobs.
Restaurants and bars were among the biggest contributors, adding 59,000 positions. Local government education added another 42,000 jobs, while the information sector continued to shed workers. The labor force also expanded by 683,000 people, an encouraging reversal after declines in June and July. Despite that influx of workers, unemployment remained at 4.1%.
Wage Growth Continues to Cool
The headline hiring number was hot, but wage data offered the Fed a more encouraging inflation signal. Average hourly earnings increased 0.3% from July and 3.1% from a year earlier, marking the weakest annual wage growth in roughly five years. That combination complicates the economic picture. Companies are hiring again, but slower wage growth suggests the labor market may not be generating the same inflationary pressure seen earlier in the economic cycle.
Fed Rate-Hike Bets Jump
Markets quickly reassessed the path for interest rates following the report. Expectations for a September Fed rate hike climbed to roughly 60%-65%, while Treasury yields moved higher and stocks came under pressure. The report strengthens the argument that the economy can withstand tighter monetary policy, particularly after Fed Chair Kevin Warsh recently emphasized that inflation remains above the central bank’s 2% target.
But employment will not be the only factor driving the September decision. Inflation is likely to have the final word. Policymakers will receive another Consumer Price Index report before their September meeting, giving them a crucial update on whether underlying price pressures are actually easing.
A Stronger Labor Market Than It Looked
August’s report also changes the narrative created by several weaker employment indicators earlier this week. July’s JOLTS report showed subdued hiring, while ADP estimated that private employers added just 38,000 jobs in August. The government payroll report paints a substantially stronger picture. With July revised back into positive territory and August delivering the strongest monthly gain in some time, fears of an imminent labor-market downturn have eased considerably.
Looking Ahead
Attention now shifts to the August inflation reports ahead of the Fed’s September meeting. Another hot inflation reading alongside 162,000 new jobs would strengthen the case for a rate hike, while softer price data could give policymakers room to remain patient. For investors, the jobs report is both reassuring and uncomfortable. The economy appears more resilient than feared, but that resilience also makes additional monetary tightening easier for the Fed to justify — putting inflation firmly back at the center of the market’s next major move.