Sep 5, 2023

Job Gains, Rising Unemployment Rate

Weekly Market Commentary

It sounds like a contradiction. Jobs increased last month, but the unemployment rate also rose. What happened?

Nonfarm payrolls rose by 187,000 in August, according to the U.S. Bureau of Labor Statistics (BLS), while the unemployment rate rose to a still-low 3.8% in August from 3.5% in July.

A quick review of the graphic below reveals that job growth continues to cool in the face of higher interest rates.

But why did the jobless rate increase last month? The unemployment rate is measured by the Household survey, which gathers data from families and households. Nonfarm payrolls, on the other hand, are measured by the Establishment survey, which collects data from businesses.

In the Household survey, the employment component rose by 222,000, and the labor force (those working AND not working but actively searching for work) jumped by 736,000.

Subtract 222,000 from 736,000, and we get a net increase of 514,000 in unemployment, which accounts for the uptick in the jobless rate.

In other words, the jobless rate didn’t rise because fewer people were working. Instead, the economy could not absorb the large number of new entrants into the labor force in August.

In some respects, this could be viewed as healthy for the economy, as businesses in some industries still don’t have the workers they need.

Bottom line

The Federal Reserve has warned that below-average economic growth is needed to correct the imbalance between supply and demand, with the ultimate goal of achieving price stability.

For workers, the slowdown in job growth could be viewed as an unwelcome development. We’re not seeing a decline in employment, but greater competition in some sectors for work increases the difficulty in landing a job or changing jobs.

For investors, the slowdown is welcome as it takes some pressure off the Federal Reserve to raise interest rates. The moderation gives the Fed room to pause on rates in September while keeping its options open later in the year.

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