Decaying jobs market overtakes inflation as U.S. economy's biggest threat

By Jeffry Bartash

Hiring slows dramatically and unemployment is rising

Lingering inflation was the chief threat to the U.S. economy just a few months ago. Now it's a rapidly cooling jobs market.

The economy added just 142,000 new jobs in August and employment gains in the prior two months were also slashed. The result: The increase in new jobs in the last three months is the smallest since the 2020 pandemic.

The latest bad news come on top of annual government revisions that show the U.S. added 818,000 fewer jobs from the spring of 2023 to the spring of 2024 than previously estimated.

"The labor market is continuing to suggest it's not as strong as previously thought," said senior economist Sam Bullard at Wells Fargo.

The big slowdown in hiring has not gone unnoticed by the Federal Reserve. Far from it. For the past month, senior central bank officials have warned that the labor market was overtaking inflation as their top worry.

The Fed is required by law to keep inflation low and employment high. With inflation slowing toward the Fed's 2% annual goal, the bank is giving greater weight to the labor market in deciding how much to cut interest rates.

The Fed is primed to cut a key short-term U.S. rate in two weeks after holding borrowing costs at a 23-year high for the past year and a half.

High rates put in place to tame inflation appears to have largely done their job, but at the cost of slowing the economy and putting the brakes on hiring.

The U.S. added an average of just 116,000 jobs a month from June to August, compared to a three-month average of 267,000 as recently as March.

Fed Chairman Jerome Powell warned in a speech last week he does not "seek or welcome" a further slowdown in hiring and stressed "we will do everything we can to support a strong labor market."

The reason is obvious enough: The economy usually rolls over and capsizes into recession when hiring screeches to a halt and unemployment begins to rise. The jobless rate has climbed to 4.2% from just 3.4% as recently as a year and a half ago.

What many economists and Wall Street DJIA SPXinvestors question is whether the Fed waited too long to cut interest rates. But inflation remained stubbornly high through the spring of 2024 and the Fed wanted to make sure prices eased further before taking its foot off the interest-rate brakes.

Lower borrowing costs should give a jolt to a slowing economy, but it might take awhile to see how the labor market responds.

The pending presidential election, what's more, is a wild card. Both candidates are promoting policies that make businesses and Wall Street uneasy.

Surveys of top executive suggest they will proceed cautiously on new hiring and investment until the outcome becomes more clear.

Whatever the case, the labor market might even be weaker than it appears. Take full-time vs. part-time employment.

The government's regular employment survey of households shows a 1.02 million decline in full-time jobs from August 2023 to August 2024. During the same time, part-time jobs increased by 1.06 million.

What that suggests is more and more people can only find part-time work, a clear sign of a slackening labor market.

The number of people collecting jobless benefits, meanwhile, has risen steadily over the past year and returned to prepandemic levels. That's a sign it's taking longer for people who lose jobs to find another one.

Job openings have also shrunk to just 7.7 million from a record 12 million a few years ago. Job listings are now back to prepandemic levels.

Fed officials publicly aren't expressing great alarm over these developments. They've predicted the labor market would cool off in response to higher rates.

Now they say the labor market is in 'better balance' - economic lingo for a a more even match between job seekers and jobs available.

The danger, some economists warn, is the scales are tilting to fast in the wrong direction. The Fed should act more aggressively in cutting rates.

"Caution will rule at the Fed, it usually does, they cut 25 [basis points] and wait and see," said chief economist Steve Blitz of TS Lombard. "I believe it would be a mistake."

-Jeffry Bartash

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09-07-24 0942ET

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