Bottom Line:
The US labor market is solid. We have been consistent in our view that the labor market is tight and even when faced with cyclical weakness, structural forces would keep the unemployment rate from rising meaningfully. The August employment report shows resilience and growth continue despite the headwinds (tariffs, energy, etc.) – and importantly cyclical strength is broadening out beyond a narrow set of industries (i.e., health care and leisure & hospitality). The underlying details are encouraging and show no signs of demand slowing:
-
the aggregate hours index is accelerating on a y/y basis,
-
broader measures of labor slack sit near all-time lows (i.e. U6 unemployment),
-
layoffs are exceptionally low,
-
and the share of workers who are part-time for economic reasons (i.e. those who want to work more but cannot) sits at 2.7%, near the all-time low of 2.3% seen in 2000.
This is a labor market that shares more similarities with the late 90s economy than the post-GFC period and it’s going to take more than a summer slowdown to throw it off course.
Encouragingly, the revision to July (+21K from a previous decline of -23K) suggests the concern over weakness was overstated. And that’s significant given the “typical” seasonal weakness we have witnessed in the summers of the past few years. But more revisions are a reminder of volatility and frequent revisions that should encourage monitoring trends over individual prints.
It’s worth noting that the preliminary benchmark revisions, while negative, were rather modest on a monthly basis, meaning we have greater confidence in the strength of this data compared to prior years. And this tightness is reflected in the unemployment rate holding steady – at 4.1% the unemployment rate is lower than 80% of all monthly readings going back to 1948. We maintain our view that the labor market will stay tight through year-end and will change little in 2027. What this means for the Fed is that their focus should remain on the inflation backdrop.
The August report was exceptionally strong
The August employment report posted a massive upside (+162K), including upward revisions to July (+21K from a previous decline of -23K), and a steady unemployment rate at 4.1%. The labor force participation ticked up to 61.6% from 61.4%.
The upside to nonfarm payrolls was primarily driven by a few sectors. Leisure and hospitality (+62K) retraced a sizeable share of jobs shed over the past two months, local government hiring ramped up in the education sector ahead of back-to-school (+33K), and health care & social assistance contributed meaningfully (+28K), as expected. Excluding these sectors, payroll gains were more modest but still sizeable. The two sectors that shed jobs were financial services and information.
The household survey data is the more interesting part of this report. This month’s jump in participation was driven by non-prime age workers. Older adults (aged 55+) accounted for half of the increase in the labor force, and the other half were youth under the age of 25. The number of unemployed job seekers ticked up, but at a slower pace than the growth in the size of the labor force – enough to keep the unemployment rate anchored. And looking at flows into employment, there were significantly more workers who found a job from out of the labor force than those who were previously unemployed, which suggests a short (less than one-month) job search timeline. Also interesting was the fact that there were twice as many quits as layoffs in August. But this could likely be explained by students leaving summer employment and returning to school.
About the authors:
Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.
Carrie Freestone is a Senior US Economist at RBC. She is responsible for generating RBC’s US economic forecasts across GDP, employment, and inflation, and providing macro commentary through publications, presentations, and the media.
Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.