Turns Out, the Labor Market is OK Despite All Moaning & Groaning about the Economy or Whatever

The Fed can focus on getting its messy inflation-house in order.

By Wolf Richter for WOLF STREET.

Payrolls at nonfarm employers jumped by 162,000 workers in August from July (blue columns in the chart). The prior two months were revised up substantially: July by 44,000, to a gain (+21,000) from an originally reported drop (-21,000); and June by 11,000. And most of the huge July drop in local government employment (mostly educators) of -62,000, the biggest month-to-month drop in years, largely bounced back in August with a gain of +50,000.

The six-month average job gain, which irons out the month-to-month squiggles and revised quirks, rose to +107,000, the biggest gain since July 2024 (red line). This job growth is occurring despite a declining labor force that resulted from the crackdown on illegal immigration and the wave of boomer retirements.

So this report on nonfarm payrolls, released by the Bureau of Labor Statistics today based on surveys of employers, ironed out some of the quirks in the July report. And for the Fed, as it contemplates whether or not it should hike its policy rates, this data today removed any remaining worries about the labor market. The 12 voting members of the FOMC can now solely focus on getting their messy inflation-house in order.

By category of private sector employers.

Two major private-sector categories shed jobs:

Financial activities (-11,000)
Information (-23,000).

All other major private-sector categories gained jobs:

Leisure and hospitality (+62,000), July revised up to -21,000 from -40,000;
Healthcare (+28,400); July revised down to +13,100 from +22,000
Construction (+22,000);
Manufacturing (+16,000), July revised up to +14,000 from +5,000; year-to-date: +58,000.
Professional and business services (+10,000);
Wholesale trade (+7,800);
Transportation & warehousing (+5,000), July revised up to +13,800 from +10,000;
Other services (+3,000).
Retail trade (+1.400); July revised up to +13,200 from -19,000).

The level of total nonfarm employment rose to 159.1 million in August.

Note the flat spot from April 2025 through February 2026, and the rise since then. That flat spot was in part caused by massive job cuts at the federal government that reduced its payrolls by 11%, or by 336,000 jobs. Those federal job reductions have largely ended now. State governments have cut 55,000 jobs over the same period, mostly in higher education, as many state universities and colleges have come under enrollment pressures. Combined, they have cut nearly 400,000 jobs at a time when private sector job growth was already slow.

Average hourly earnings rose by 0.27% in August from July, and by 3.1% year-over-year, to $37.75 per hour.

Inflation has been running hot for months, with the most recent CPI rising by 3.4%, and this wage gain of 3.1% is lagging the rate of CPI inflation, after outrunning CPI inflation over the past three years through early 2026.

The labor force has been on a downward trend as a result of the crackdown on illegal immigration, the tightening up of legal immigration, and the continuing boomer retirements. The labor force consists of people who are working and people who are not working but are actively looking for work. When a person decides to retire, they exit the labor force. The data is collected via surveys of households.

The labor force rose in August, after two big monthly drops. Given the big month-to-month swings in the labor force data, and the huge adjustments, we look at the three-month average, which irons them out and shows the trend.

The three-month average in August dropped by another 100,000 people in the labor force. Since the peak in December, the three-month average labor force has dropped by 2.07 million.

This continued drop in the labor force – representing a decline in the supply of labor – has changed the dynamics of the labor market, leading among other things to a very low unemployment rate, despite so-so job creation.

The unemployment rate remained at 4.1%, a historically low rate within a 50-year timeframe, largely because of the shrinking supply of labor.

The unemployment rate reflects the number of unemployed people who are actively looking for a job (7.03 million) divided by the labor force (169.8 million).

The prime-age labor force participation rate remained at 83.4% in August, same as in July, and both were up from June (blue in the chart below).

The three-month average declined to 83.4% (red). This range that has prevailed since mid-2024 is the highest in over 20 years.

The prime-age labor force consists of people between 25 and 54 years old. It eliminates the issue of the retiring boomers. When people retire and stop looking for a job, they’re no longer “participating” in the labor force but remain in the population until they die. It’s the surge of boomer retirements over the past 15 years that has pushed down the overall labor force participation rate (not shown here), but not the prime-age labor force participation rate.