Labor Market Stabilizes in August as ISM Indices Continue to Signal Slowing Growth

Key Takeaways:

• Nonfarm payroll employment increased by 142,000 in August, an improvement from July’s downwardly revised estimate of 89,000 jobs added, according to the Bureau of Labor Statistics (BLS). The June and July employment figures were revised downward by a combined 86,000. The unemployment rate ticked down one-tenth to 4.2 percent, due in part to a reversal of the large increase in those reporting temporary unemployment in July. Average hourly earnings increased 0.4 percent, double the pace in July.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 237,000 to 7.7 million in July, the lowest level since January 2021, according to the BLS. The June openings data was also revised downward. The quits rate was 2.1 percent, an increase of one-tenth after June’s figure was revised downward. Layoffs and discharges rose 12.9 percent to 1.76 million, though this figure remains modestly below the 2019 average.
• The Institute for Supply Management (ISM) Manufacturing Index increased 0.4 points to 47.2 in August. The marginal improvement was due mostly to a 5.8-point increase in the inventories index. The new orders index was down 2.8 points to 44.6, its lowest level since May 2023, and the production index declined 1.1 points to 44.8, the lowest level since the onset of the pandemic.
• The ISM Services Index ticked up one-tenth to 51.5 in August. The new orders index rose 0.6 points to 53.0, while the business activity index was down 1.2 points to 53.3. The employment index was above the expansionary threshold of 50 for the second consecutive month despite a 0.9-point decline to 50.2.
• Light vehicle sales declined 5.7 percent to a seasonally adjusted annualized rate (SAAR) of 15.1 million in September, more than reversing last month’s 4.0 percent gain, according to Autodata.
• The real goods U.S. trade deficit widened by $6.3 billion in July, according to the Census Bureau. Real exports declined 1.2 percent after a 3.1 percent gain the month prior while real imports rose 1.9 percent.
• Private residential construction spending declined 0.4 percent in July, according to the Census Bureau. Spending on single-family construction fell 1.9 percent, while multifamily construction spending was flat. Spending on improvements was up 1.2 percent and is now up 22 percent year to date.

Forecast Impact:

The August labor report was close to consensus and our expectations. Job growth over the past several months is close to our estimate of what is necessary to keep pace with population growth. Additionally, the tick down in the unemployment rate helps assuage fears that labor market conditions have weakened substantially. We believe the Fed remains on track to cut rates in September, a view supported by current market pricing.

While both the ISM manufacturing and services indices were roughly flat in August, the underlying details suggest that activity is continuing to slow. The new orders component of the manufacturing index, in particular, implies that future manufacturing activity will soften further in coming months. When combined with the services index that is barely in expansionary territory, we believe these readings are consistent with our forecast for slower growth in coming quarters. Additionally, the trade data suggests that net exports will again drag on GDP growth in the third quarter. While robust base effects stemming from upward revisions to estimates of second quarter consumption will likely keep GDP growth strong in the third quarter, we see most incoming data as being consistent with economic growth slowing.

Nathaniel Drake
Economic and Strategic Research Group
September 6, 2024

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