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Economic & Housing Weekly Note

Labor Market Conditions Cool over the Summer as Services Activity Jumps

September 8, 2023

Key Takeaways:

  • Nonfarm payroll employment rose by 187,000 in August, though the prior two months were revised downward by a combined 110,000 jobs, according to the Bureau of Labor Statistics. The unemployment rate jumped three-tenths to 3.8 percent, its highest level since February 2022, though this was due largely to an increase in the labor force participation rate, which rose two-tenths to 62.8 percent, its highest level since before the pandemic. Average hourly earnings rose 0.2 percent, a slowdown from the 0.4 percent month-over-month growth rate in June and July.
  • The ISM Manufacturing Index rose 1.2 points to 47.6 in August. While still in contraction, the headline index is now at its highest level since February. The production index rose 1.7 points to 50.0, and the employment index jumped 4.1 points to 48.5. Still, the typically leading new orders index declined 0.5 points to 46.8. Both the supplier deliveries index and the non-seasonally adjusted prices paid index rose in August but remained below 50, suggesting supply chain conditions continue to improve, albeit at a slower pace.
  • The ISM Services Index rose 1.8 points to 54.5, indicating the fastest pace of expansion since February. The new orders index jumped 2.5 points to 57.5, and the employment index was up 4.0 points to 54.7. While supplier delivery timelines continued to contract, the prices paid index increased for the second straight month, rising 2.1 points to 58.9, the highest level since April.
  • Light vehicle sales declined 4.6 percent to a seasonally adjusted annualized rate of 15.2 million in August, according to Autodata. Following the decline, auto sales are around 2 million annualized units below their pre-pandemic norm.
  • Factory orders declined 2.1 percent in July, giving back most of the 2.3 percent jump in June, according to the Census Bureau. Durable goods orders fell 5.2 percent following the 4.3 percent jump due to aircraft orders the month prior. Orders of nondurable goods rose 1.1 percent.
  • The real goods U.S. trade deficit widened by $2.6 billion to $88.4 billion in July, according to the Census Bureau. Real imports increased by 1.8 percent, while real exports were up 1.1 percent, the third consecutive monthly increase for the latter.
Forecast Impact:

Employment gains in August were slightly above our expectations. Still, considering the significant downward revisions to June and July, we believe labor market conditions are generally cooling. In fact, the three-month moving average of employment gains currently sits just below the average monthly payroll gain in 2019, and the unemployment rate is at its highest level in 18 months. While the rise in the unemployment rate comes with caveats, including an increase in the labor force and large layoffs in the trucking industry following a business closure, if the higher unemployment rate is sustained, it could be a sign that the economy can no longer absorb new labor as quickly as it could earlier in the year.

Other indicators generally improved in August, with both the ISM manufacturing and services indices at their highest levels in six months. This is supportive of current economic strength and, combined with other data on spending, is expected to lead to an upward revision to our third quarter 2023 GDP forecast. However, we continue to believe growth will slow over the coming months as higher interest rates continue to work their way through the economy, a dynamic that is likely at least in part responsible for weakness in new auto sales in August.

Nathaniel Drake
Economic and Strategic Research Group
September 8, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.