Employment report August 2026

Truly ‘satisfactory’

Hiring momentum softened in July, though private-sector job creation remained positive. Private payrolls rose by 30,000 for a second consecutive month while government employment fell by 53,000, driven largely by Federal Reserve Governor Christopher Waller described the labor market as “satisfactory” in recent remarks. The August jobs report could argue for an “exceeding expectations” grade, but one-time factors argue against excessive enthusiasm.

The economy added a net 162,000 jobs in August, well above expectations, with combined upward revisions to payrolls in June and July of 55,000 jobs. As such, the three-month rolling average of job growth rebounded to a moderate pace of 71,000 jobs.

Looking across sectors, the labor market remains stable, with special one-off gains in certain sectors. Government employment posted its strongest gain in nearly two years, up 35,000 jobs, lifted by the largest increase in local education payrolls since 2022, up 42,000. The larger-than-usual back-to-school rebound in employment came after an unusually large seasonal plunge in July.

On the private-sector front, most sectors saw modest payroll gains, with the notable exceptions of information, down 23,000 jobs, and finance, down 11,000 jobs. Still, roughly three-quarters of the strong payroll gain in private services came from leisure and hospitality payrolls rebounding by 62,000 following unusually large declines in June and July. Most of the gains came from restaurants and bars, which posted their largest monthly gain since early 2023.

Employment growth in the healthcare sector, one of the most consistent job pillars post-pandemic, was more modest, up only 13,000 in August, while professional and business services employment increased by a net 10,000 jobs. The retail sector gained only 1,000 jobs.

At first glance, it seems the expiration of Temporary Protected Status work authorization for Haitian nationals — roughly 200,000 individuals are estimated to have held work authorization under the program — has yet to appear in the employment statistics. We anticipate it will represent a visible drag in the coming months, particularly in labor-intensive service sectors.

The unemployment rate was unchanged at 4.1%, even as the labor force participation rate rebounded 0.2 percentage points (ppt) to a four-month high of 61.6%. This is very encouraging, as most of the recent downward pressure on the unemployment rate came amid a severe drop in labor force participation, reflecting a smaller labor force. Still, the labor force participation rate is down 0.8ppt since December of last year, reflecting reduced population growth, aging demographics and lower immigration flows.

Labor market conditions remain broadly disinflationary, and the income squeeze persists. Wage growth momentum eased a tick to 3.1% year over year (y/y) in August, with hourly earnings rising a moderate 0.3% on the month. With Consumer Price Index (CPI) inflation expected to come in at 3.4% y/y in August, real wages will likely fall 0.3% y/y, contracting for a fifth consecutive month. While strong wealth effects from stock market gains continue to support solid aggregate consumer spending, we cannot look away from the growing income squeeze affecting many households’ day-to-day spending decisions — this will cap consumer spending growth in H2.

Overall, a steady payroll trend, low layoffs and a low unemployment rate point to a stable, if frozen, labor market. As such, Fed policymakers’ attention will focus on inflation and the August CPI report. A modest core CPI print of around 0.2% month over month (m/m), translating into core CPI inflation easing a tick to 2.4% y/y, would likely tilt the Federal Open Market Committee (FOMC) toward holding monetary policy unchanged at the September meeting.

Indeed, the FOMC core appears willing to exercise patience, with New York Fed President John Williams stating that he does not see “clear-cut evidence right now” that the Fed must raise interest rates and Governor Waller stating that, if the disinflationary trend continues in August, he would be inclined to hold the fed funds rate unchanged.

Following the employment report, markets are now placing 61% odds of a fed funds rate hike by September, up from 52% before the report. We believe the odds of a rate hike are closer to a coin toss, and we maintain our out-of-consensus view that a September hold remains the most likely outcome.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.