US Job Market: How does poor jobs data affect the US Economy and influence US Fed rates?

The US Job Market exhibits slower growth as the unemployment rate jumps higher to 3.8% from 3.5% in August 2022, contradicting the 187,000 new jobs created in August. The chart below shows the unemployment rate from August 2021 to August 2023.

The US employment data is one of the most critical factors that the Federal Reserve considers when making monetary policy decisions. It helps the Fed assess whether the economy is at or near maximum employment and whether inflation is rising or falling.  

The unemployment rate is the most commonly cited measure of employment. It is the percentage of the labor force that is unemployed and actively seeking work. The Fed typically targets an unemployment rate of around 4%. However, the unemployment rate can be affected by a number of factors, such as the demographics of the workforce and the state of the economy.  

The US employment data can affect monetary policy in a number of ways. For example, if the unemployment rate is rising, then the Fed may decide to lower interest rates in order to stimulate the economy and create more jobs. Conversely, if the unemployment rate is falling, then the Fed may decide to raise interest rates in order to prevent inflation from rising.  

US Job Market Slows Down: Labor Force Participation Rate Surges

The labor force participation rate is the percentage of the adult population employed or unemployed. A higher participation rate shows that more people are participating in the economy. The rate rose by 0.5 points to 62.8% from 62.3% in August 2022.

However, according to the US Bureau of Labor Statistics, the labor force participation rate is expected to decrease from the current 62.8% to 60.4% in 2032. This estimated decline will be primarily due to more people aged 65 and older choosing not to work.

The Federal Reserve is actively trying to combat inflation, and they want to see more available workers in the job market. They are concerned that a shortage of workers could lead to higher wages, which, in turn, might cause inflation to go up.

US Job Market Slows Down: Employment Numbers Across Different Industries

Job gains were seen across most sectors like healthcare, leisure/hospitality, social assistance, and construction, while employment in transportation and warehousing had a downtrend. 

US Job Market Slows Down: Average Hourly Earnings and Workweek

Average hourly earnings of all employees rose by 0.2% from June 2023 to $33.82. Past one year, it has grown by 4.3%. The average workweek for all employees on private nonfarm payrolls rose by 0.1 hour to 34.4 hours in August.

The average hourly earnings is a measure of how much workers are paid. It is vital for the Fed because it can help to determine whether inflation is rising. If wages are rising faster than prices, then inflation is likely to increase.  

US Job Market Slows Down: What Lies Ahead?

According to the U.S. Bureau of Labor Statistics, the American economy is expected to create nearly 4.7 million new jobs from 2022 to 2032. This would bring the total number of jobs to 169.1 million, growing at a slower rate of 0.3% per year. This growth is less rapid compared to the 1.2% annual growth observed from 2012 to 2022.

Thus, slower job growth, a decrease in the ratio of job openings to available workers, and a slight increase in the unemployment rate could be seen as positive by the financial markets. This is because it might reduce concerns about the Federal Reserve raising interest rates in the future.