The August jobs report came in meaningfully stronger than expected, with the economy adding 162,000 jobs, nearly triple consensus expectations. Additionally, upward revisions to the prior two months lifted the three-month moving average to 71,000, a robust pace given recent labor supply constraints. While robust job creation underscores the strength of the jobs market, the unchanged unemployment rate and steady wage growth indicate that labor market overheating remains limited, making next week’s inflation report the likely swing factor in the Fed’s September policy decision.

• Total non-farm payrolls rose by 162,000, well above the expected gain of 55,000. Moreover, the prior two months were revised higher, adding an additional 55,000 jobs over the period. The stronger headline figure and the upward revisions reinforce the economy’s resilience. Notably, the year-to-date average payroll gain of roughly 80,000 remains well-above the Fed’s near-zero estimate of breakeven employment, or the number of jobs needed to keep labor market conditions stable, supporting Warsh’s assessment of full-employment labor market conditions.
• The stronger-than-expected reading was accompanied by broad job gains, with 9 of the 11 major sectors adding jobs. Healthcare employment continued to expand, likely supported by aging demographics. That said, the pace of healthcare job growth has slowed in recent years, a dynamic worth monitoring as the sector has been a key component of overall hiring. Encouragingly, several cyclical sectors – mining, construction, manufacturing, and trade – posted gains, in contrast to the softer trends observed last year. Employment in food services rebounded meaningfully, while local government education drove much of the increase in government jobs, likely reflecting seasonal trends.
• The two sectors posting job losses were information and financial activities. The information sector remains at the forefront of AI-related displacement and has shed nearly 12% of jobs since late 2022. Within financial activities, losses were concentrated in insurance and real estate. Employment in the latter has trended lower for several years, consistent with a sluggish housing market as affordability constraints and elevated borrowing costs continue to weigh on activity. 
• Despite a larger-than-expected increase in labor force participation, the unemployment rate remained unchanged at 4.1%, highlighting the resilience of labor demand. Even so, the 61.6% labor participation rate is meaningfully below its 62.8% cycle high and near decade lows, excluding the pandemic. Declining labor supply, driven by aging demographics and slower immigration inflows, is well acknowledged by the Fed and explains why estimates of breakeven payroll growth have fallen to near zero, a sharp contrast with the 150,000+ estimates in 2023-24. 
• Average hourly earnings rose modestly versus last month, though annual wage growth eased to 3.1% from 3.2% and reached its lowest levels in five years. The softness suggests there’s no evidence of wage-driven inflation pressures despite the recent energy shock. However, with wage growth now running below inflation, it is worth monitoring whether households come under further pressure.

In addition to the government employment data released each month, Principal has access to a unique set of proprietary indicators derived from our retirement and benefits businesses. These data track employment and wage trends across millions of Principal’s participants and provide an alternative view of labor market conditions across industries. While they should be viewed as complementary to, not a substitute for, official BLS statistics, they can help provide deeper insight into how employers and workers are responding to changing economic conditions.

Based on Principal’s proprietary data, the labor market appears even healthier beneath the surface than the latest BLS industry breakdown alone suggests, but that strength is rotating. We see continued growth across a wider set of industries, while trends in small- and medium-sized business employment reveal cooling in several former leaders and improvement in areas such as Manufacturing and Leisure & Hospitality.