Labor market bounces back

Bottom line 

Good news on the economy could be bad news for interest rates and stocks. This morning, the Bureau of Labor Statistics (BLS) reported that US nonfarm payrolls soared in August. This sharply reversed the quirky seasonal problems that had undermined July’s disappointing labor report. The odds that the Federal Reserve raises rates by a quarter-point rate at its policy-setting meeting in September rose to 61% this morning. Equities corrected in response.

The August tally was a much stronger-than-expected gain of 162,000 jobs. The consensus was 55,000. Our more constructive estimate here at Federated Hermes was for 112,000. The BLS revised the combination of June and July reports higher by the same amount of 55,000 jobs. Nonfarm payrolls have now averaged a robust gain of nearly 107,000 over the past six months, compared with adding less than 10,000 per month in the entirety of 2025.

Private payrolls also added a solid 127,000 jobs in August (consensus at 50,000), with a combined upward revision of 37,000 in June and July. Private payrolls have averaged 106,000 jobs over the past six months, compared with less than 25,000 per month during 2025.

July’s seasonality problems reverse As we expected, the 57,000 local government jobs we lost in July — mostly in education — reverted to a gain of 50,000 in August, as teachers returned to school. Go figure. The 19,000 retail jobs we lost in July — due to the completion of the global soccer tournament and the America250 celebration —  was revised to a gain of 13,000 jobs. Finally, we lost a revised 21,000 leisure & hospitality jobs in July but added an outsized 62,000 jobs in August.

Household employment soars The unemployment rate (U-3) held steady at a one-year low of 4.1% in August, down from 4.4% in February. The broader measure, the labor impairment rate (U-6), dropped to a 14-month low of 7.7%, down from 8.2% in April. The labor force participation rate (the share of the population that is either working or is actively looking for work) rose to 61.6% in August, up from a five-year low of 61.4% in July.

The civilian labor force leapt by 683,000 last month, as more people were confident enough to re-enter the labor force. Household employment soared by 569,000 in August, up from a decline of 87,000 in July, while the number of unemployed people who are still looking for gainful employment rose by 115,000 in July. 

Wage inflation continues to slow Average hourly earnings in August increased by a five-year low of 3.1% y/y, down from 3.7% in February. With the overall strength in today’s employment report, investors will pore over next week’s critically important retail inflation readings for August. The consensus expects that core CPI retail inflation will slow again from a seven-month high of 2.9% year-over-year (y/y) in May 2026 to an estimated five-year low of 2.4% in August. In addition, average hours worked ticked up to a two-year high of 34.4 in August. Every 0.1 change represents an estimated addition of 350,000 workers to the economy.

Other key labor-market indicators are mixed:

• ADP private payrolls disappoint again August rose by a weaker-than-expected seven-month low of 38,000 jobs (consensus gain of 47,000 expected) versus 46,000 in July, 95,000 in June, and a 16-month high of 122,000 in May. Workers who changed jobs last month saw their wages rise by 7.3% y/y, less than half the cycle peak of 16.1% in April 2022, but up from a gain of 6.3% in May. Job stayers earned a more modest boost of 4.4% y/y for the third consecutive month, well below the peak of 7.8% in September 2022.
• Initial weekly jobless claims remain low This high-frequency leading employment indicator plunged to a 57-year low of 189,000 claims in mid-July and has averaged a very benign 207,000 during the month of August.
• Challenger, Gray & Christmas layoffs decline Companies announced job cuts of 52,881 in August, representing a four-year low over the first eight months collectively of 2026. To be sure, while August 2026 was 58% higher than July, it’s nearly 39% lower than year-ago levels.
• Job Openings & Labor Turnover Survey The lagging JOLTS report was slightly better than expected in July, as job openings of more than 7.27 million were 1.2% higher than June levels and 11% higher than December 2025’s five-year low of 6.55 million. However, that’s still 40% below a record 12.182 million job openings in March 2022. New hires at only 5.054 million in July declined by 5.2% from 5.33 million in June, but they’re still 3% higher than February’s six-year low of 4.9 million. The rate of job openings at 4.4% in July is still above December 2025’s five-year low of 4.0%, having inched up from 4.3% in June. But they slipped from 4.6% in April. The record high was 7.4% in March 2022. The ratio of available job openings for every unemployed worker was marginally improved at 1.05 in July, up from 1.0 in each of the prior four months and a five-year low of 0.9 in February, but still well below a peak of 2.0 in March 2022. The quits rate slipped to a six-year low of 1.9% in July, down from 2.0% in June and May.

K-shaped labor gap continues to narrow The unemployment rate for less educated workers plunged to a three-year low of 4.7% in August, down from 6.4% in April. The rate of unemployment for highly educated workers was unchanged in August at 2.7% for the fourth consecutive month, down from 3.0% in February.

Sector details mixed:

• Temporary help (an important leading employment indicator) added 7,000 jobs in August, marking its seventh gain over the past eight months.
• Manufacturing added a much stronger-than-expected three-year high of 16,000 in August, up from solid gains of 14,000 in July and 13,000 in June. That’s consistent with the strength in the ISM manufacturing index, which has been in expansion territory (above 50) in each of the first eight months of 2026 for the first time in four years.
• Construction surged to a seven-month high of adding 22,000 jobs in August. The sector has added jobs for six consecutive months, likely due to strong business capital expenditures and data center construction.
• Retail added 1,000 jobs in August, but July was revised from a loss of 19,000  to a gain of 13,000, and June was revised from a loss of 4,000 to a gain of 10,000. The sector has added jobs for six consecutive months, due to solid “Marpril” and Back-to-School spending. The global soccer tournament and America250 hiring activity in bars and restaurants contributed.
• Leisure & hospitality hiring spiked to a strong gain of 62,000 jobs in August, while July was revised from a loss of 40,000 to a smaller decline of 21,000.