Labor market report August 2024:

The US economy created slightly fewer jobs than expected in August. This is partly due to the weakening of the labor market, but also paves the way for an interest rate cut by the US Federal Reserve later this month.

Nonfarm payrolls rose 142,000 for the month, down from 89,000 in July and below the Dow Jones consensus forecast of 161,000, according to a report from the U.S. Labor Department's Bureau of Labor Statistics released Friday.

At the same time, the unemployment rate fell to 4.2% as expected.

The number of employed people grew by 120,000 during the month, helping to reduce the unemployment rate by 0.1 percentage point, although the labor force participation rate remained at 62.7%. An alternative indicator that includes discouraged workers and those working part-time for economic reasons rose to 7.9%, the highest since October 2021.

The markets initially barely reacted to the data. Stock futures remained in the red and yields on US government bonds also fell.

While August's numbers were close to expectations, the two previous months saw significant downward revisions. The BLS cut the July total by 25,000, while the June total fell to 118,000, a downward revision of 61,000.

Across all sectors, the construction industry led the way with 34,000 additional jobs. Other significant increases were recorded in the health sector with 31,000 jobs and social assistance with an increase of 13,000 jobs. The manufacturing industry lost 24,000 jobs over the course of the month.

As for wages, average hourly earnings rose 0.4% month-on-month and 3.8% year-on-year, both above estimates of 0.3% and 3.7%, respectively. The number of hours worked rose slightly to 34.3.

The report comes as markets are nervous about the Fed's next move. The Fed has left interest rates unchanged since July 2023 after deciding on a series of significant hikes to reduce inflation.

Before the release, markets had priced in a 100 percent probability that the Fed would begin cutting interest rates at its meeting on September 17-18. The only question was by how much.

Following the release of the payroll figures, futures market prices trended toward a half-percentage point cut, according to the CME Group's FedWatch indicator.

“For the Fed, the decision comes down to deciding which poses the greater risk: a resurgence of inflationary pressures if it cuts interest rates by 50% [basis points] or impending recession if they cut by just 25 [basis points]said Seema Shah, chief global strategist at Principal Asset Management. “All in all, with inflation pressures subdued, there is no reason for the Fed not to play it safe and bring interest rates forward.”

Recent economic data point to continued growth but a slowdown in the labor market. Payroll processing company ADP reported Thursday that private companies added just 99,000 jobs in August. Outplacement firm Challenger, Gray & Christmas reported that layoffs rose sharply in August and hiring hit the lowest level since 2005.

Most Fed officials have indicated that they also expect interest rates to fall. In his key annual speech at the Fed conclave in Jackson Hole, Wyoming, Fed Chairman Jerome Powell announced that “the time has come” to adjust monetary policy, but did not say what that means in concrete terms.

In a speech on Friday morning, New York Fed President John Williams advocated interest rate cuts.

“With the economy now in equilibrium and inflation on track toward 2 percent, it is now appropriate to reduce the degree of policy tightening by lowering the target range for the federal funds rate,” Williams said in a speech to the Council on Foreign Relations in New York.

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