By the time this article is published, we will have answers to the questions many have been asking for the better part of the past six months, if not longer: “When will the Fed finally lower interest rates? And by how much?” The consensus is that the Fed will almost certainly cut rates on Wednesday, September 18, but the magnitude of the cut is unclear.
Why is a rate cut a near certain event? The economy is moving in the wrong direction.
U.S. businesses added 142,000 jobs in August, and revisions to June and July’s totals show the labor market added 86,000 fewer jobs than initially reported. Unfortunately, downward revisions have become the norm in recent months.
Revisions happen every month as a result of recalibrating survey estimates based on new data. Over the long term, downward revisions are about as common as upward revisions. However, during periods of economic slowdown, downward revisions tend to be more common. The recent revisions are consistent with an economy experiencing slower growth.
Things may look and feel better – or worse – depending on your industry or location, but there is no reason to panic. August’s job gains bring the annual total to about 1.5 million, an average of 184,000 new jobs per month through the first eight months of the year.
To put these numbers in context, from 2015 through 2019, we averaged 190,000 new jobs added monthly, and annual hiring totals averaged 2.3 million. If we keep adding jobs each month at the current pace, we will add 2.2 million new jobs this year. There are challenges in today’s labor market, and the trends aren’t moving in the right direction. But, again, there’s no reason to panic.
While hiring totals remain strong, they don’t tell the full story. Digging into industries, it’s clear that some sectors are growing, some are losing jobs, and many are middling along.
In August, just four industries—government, healthcare, leisure and hospitality, and construction—accounted for 95% (135,000) of all job gains. Private-sector job growth has cooled substantially. The information sector, which includes a range of companies from tech to media to entertainment, has faced some of the biggest challenges, losing 7,000 jobs in August.
Manufacturing employment shrunk by 24,000 workers in August. Job losses in manufacturing were driven by broad declines in employment across the durable goods subsector, which employs more than 8 million workers and includes the production of electronics, cars, furniture, and transportation equipment, among other items. Some of the decline in manufacturing employment could be attributed to seasonal factors such as production slowing in the summer. However, high interest rates have also made it more expensive for consumers to make big-ticket purchases like cars, and it’s more expensive to buy a home right now, contributing to decreased demand for appliances and furniture.
Another factor to watch when it comes to manufacturing is the airline industry. Following high-profile issues with aircraft and a strike by 33,000 workers, Boeing recently announced a hiring freeze. While these events might not be picked up in August’s numbers, they could contribute to lower industry employment in the coming months.
One of the best trends over the past several months is the pace at which we’ve seen inflation come down. The Fed began rapidly increasing interest rates in 2022 to stem inflation by cooling the economy, and the inflation-fighting goal of their monetary policy has been largely successful.
However, we are now past the point where the benefits of high interest rates (cooling inflation and bringing the labor market into balance) outweigh the costs (cooling the labor market to the point where hiring slows and unemployment continues to rise).
The growth in the consumer price index reached a peak in June 2022, when prices grew 9.1% year-over-year, compared to 2.5% annual price growth in August of this year. At the same time, wages grew by 3.8% year-over-year in August. This means that most workers’ paychecks are growing faster than the prices of goods they’re buying.
Inflation coming down doesn’t mean everything is suddenly more affordable. There are still challenges with affordability, especially the cost of rent and buying a home. I occasionally hear the misconception that inflation coming down means prices are decreasing. But cooling inflation means that prices are growing at a slower rate.
Wage remains in the headlines
While hiring has slowed considerably this year, wage growth has remained robust. As mentioned above, wages increased 3.8% in August, one of the few metrics in last month’s report to come in on the positive side of expectations.
And wage growth is not likely to let up heading into 2025. A recent survey showed U.S. businesses expect salary increases of 3.9% in 2025. LaborIQ’s 2025 forecast shows wage growth closer to 3.5% next year, but that could be revised upward if current trends hold. I’ve said this before, but we aren’t returning to the pre-pandemic 2–3% any time soon.
Businesses are in a bind. They face the dueling challenges of robust wage growth and a more sluggish economy. Slower economic growth puts pressure on budgets and creates uncertainty heading into 2025. However, competition for talent remains strong, and businesses not keeping up with compensation trends risk losing top talent.
Companies are still hiring for new positions and backfilling open roles. The good news is there’s a lot of competition for top talent. However, as we head into budget and merit planning season, compensation will remain an important part of talent attraction and retention strategies.
