The United States labor market is starting to look a lot like its old self — the one that existed before the pandemic.
The Federal Reserve’s interest rate increases have chilled investment, high-flying industries have returned to earth, and workers are staying put in their jobs rather than jumping for higher pay.
Employers added 187,000 jobs in August, the Labor Department reported Friday, and the previous two months’ figures were revised downward. That brings the three-month average to 150,000 — a marked slowdown from the 200,000 achieved for 29 consecutive months before that, and slightly lower than the average pace of 163,000 in 2019.
The question is whether that cooling will continue to levels that feel more like a real freeze as borrowing costs remain high and pressures on consumer spending mount.
“I think the labor force is finally healing to the point where we’re seeing some pre-Covid numbers,” said Chris Chmura, chief executive of Chmura Economics & Analytics. “But taking a step back and looking at broader trends in the economy, we’re not ruling out the potential of a recession next year.”
Hoping to contain price growth without causing a painful recession, the Federal Reserve has been looking for assurance that the labor market is loosening enough to reduce the risk that excessive demand for goods and services might cause inflation troubles to reignite.
A jump in the unemployment rate, to 3.8 percent in August from 3.5 percent, provides some of that evidence. Rather than a jump in layoffs, the difference came mostly from an increase of 736,000 in people starting to look for work. As a consequence, the overall labor force participation rate rose to 62.8 percent, within a half a percentage point of its prepandemic high.
A slightly softer-than-expected increase in wages adds to that picture, with hourly earnings rising 4.3 percent from a year earlier, mostly level with the pace of wage growth since the spring. The August report reinforced market expectations that the Fed will hold interest rates steady at its next meeting, in mid-September, as it waits to assess the impact of the five-percentage-point increase over the past year and a half.
The recent hiring figures are subject to further revision; the Bureau of Labor Statistics has already indicated that job growth will look slightly weaker when it completes its annual benchmarking process.
But the overall trajectory is a sign that although the labor market is not as hot as it was during the height of the pandemic recovery, it may be leveling out in a better form than it took before 2020.
“The good news is, it’s a normal that favors workers more than we’re used to over the past 25 years,” said Justin Bloesch, an assistant professor of economics at Cornell University. Moreover, he noted, stability has its own benefits: People are more likely to join the work force if they feel confident they will be able to stay there awhile.
“This is where we start to get to the time where the duration of a good labor market matters more than how good,” Dr. Bloesch said.
Much of the slowdown has come from industries that are returning to more typical levels after the pandemic’s upheaval. Exhibit A: truck transportation, which grew to serve a stay-at-home online shopping spree and shrank as it died down. Trucking company payrolls flattened out over the past year, which probably masks an outright decline because many contracted owner-operators have also parked their rigs.
Last month, the industry subtracted nearly 37,000 jobs all at once with the bankruptcy of Yellow, which employed about 30,000 drivers and other staff members. If the mid-August jump in initial claims for unemployment insurance are any indication, most of those drivers did not immediately find new jobs.
“The truck job market has gone from excruciatingly tight in 2021 and the first half of 2022 to being as loose as it’s been since sometime shortly after the Great Recession,” said Kenny Vieth, president and senior analyst at ACT Research. “With Yellow taking 20-plus-thousand drivers out of the market, it’s a start in getting supply under control.”
It’s not just the trucking industry, however. The rest of the labor market is also coming into balance, with the number of job openings per unemployed worker declining to about 1.5 in July from more than two in early 2022, indicating that employers’ appetite for labor is nearly sated. Over the past year, the temporary help services industry has lost 185,000 jobs as employers have less need for extra short-term labor and can rely on their regular employees. The average number of hours worked per week has also receded, with overtime becoming less essential as payrolls have filled out.
That squares with what Kevin Vaughan has been seeing at his collection of six bars and restaurants in Chicago. It’s been a very busy summer, and over the past year, he’s had to fight to keep cooks and servers. Lately, though, he’s seen more qualified job applicants who need work because their starting dates at law firms have been deferred. He worries that the resumption of student loan payments may cause his customers to cut back on nights out with friends, but it helps him maintain consistent staffing.
“Now we’re becoming much more cost-focused,” Mr. Vaughan said. “And those who are already on our payroll are becoming much more focused on, ‘I need to make money, I got expenses, I need to show up to work.’”
With hiring frenzies abating, employment growth has narrowed to a few industries that are still in recovery, like leisure and hospitality, or are set up for sustained demand because of structural factors in the economy, like private health care and education services. Those two broad sectors have accounted for 85 percent of the job gains over the past three months. Both are also disproportionately supplied by immigrants and women, groups that have entered the labor force at rates that surprised many analysts.
“At some point, and you’re seeing that somewhat on the leisure and hospitality side, those legs run out,” said Stephen Juneau, an economist with Bank of America Merrill Lynch. “Health services are structurally supported by aging demographics, and we’re just getting hospital funding back to normal. Once those support legs come off, what are we left with?”
One possible answer is renewed energy on the goods-providing side of the economy. Construction has remained surprisingly resilient. Home building has buckled under the strain of rising interest rates, and high vacancy rates have stalled office construction, but public infrastructure funding and tax breaks for renewable energy installations and semiconductor plants are creating more demand on the horizon.
Demand for cement is a leading indicator of jobs in construction, and it’s expected to decline by 2 percent this year, after a 13-year growth streak. But Ed Sullivan, chief economist for the Portland Cement Association, sees a turnaround next year fueled by federal spending on roads, bridges and other infrastructure.
“We haven’t really seen a heck of a lot of demand yet, but it’s starting to emerge,” Mr. Sullivan said. So far, a long backlog in orders has prevented significant layoffs. “It’s not having a significant adverse impact on employment, because we still need the drivers, we still need the contractors, et cetera,” he said.
Much of that construction spending is on new factories, which indicates that manufacturing employment — which has been flat in 2023 — may pick up next.