Summer heat wave tips Fed’s hand

September 4, 2026

Payroll employment surged 162,000 in August, after being revised up by 55,000 for the previous two months. The public sector added back a net 35,000 jobs, 50,000 of which showed up in local government. The drop in local education was largely reversed. The federal government shed another 5,000 jobs. Employment in federal government has shed 48,000 jobs since the start of the year and is current hovering near 1966 lows.

Private sector job gains were driven by leisure and hospitality, which added 62,000 after shedding 75,000 jobs over the last two months. That suggests that the layoffs due to the loss of the Temporary Protected Status (TPS) of Haitian workers contributed to earlier layoffs, which employers scrambled to replace in August. 

Healthcare and social assistance added 28,400 in August after adding 13,100 the previous month. That marks a sharp slowdown from earlier in year. TPS workers dominated jobs in the care economy, with more than 100,000 estimated to be working in low-wage largely eldercare jobs. 

Those jobs were harder to replace, given state cuts to Medicaid. Another cliff on Medicaid will be hit in fiscal 2027. Some $47 billion in transfers to states has been cut, although both sides of the aisle are now weighing whether those cuts will stick.

Employers in the Federal Reserve's Beige Book survey commented that filling low-wage jobs was getting more difficult. The National Federation for Independent Business reported increased labor shortages and difficulty finding workers. 

Construction added 22,000 jobs, mostly in specialty nonresidential construction. The gains in commercial construction activity are dominated by the AI boom and data center construction. Backlash to data centers has intensified, despite the tax revenues that data centers are generating at the local levels. There were some new jobs in residential construction, despite the ongoing weakness in the housing market.

Manufacturing added 16,000 jobs with strong gains in metals and machinery. Those are protected by tariffs and enhanced by data center construction. Motor vehicle and parts production shed 4,500 jobs during the month. Vehicle sales surged in August as affluent consumers bought ahead of feared increases in tariffs. That is the exact behavior the Federal Reserve is tasked to avert.

Information shed 23,000 jobs. Losses were broad-based. This is the one sector where the AI innovations and the costs of data centers are causing job losses. It includes tech, broadcast, data processing and publishing.

Average hourly earnings rose 0.3% from July, after adding an upwardly revised 0.2% in July. That translates to a 3.1% increase from a year ago. However, wages as calculated by the Atlanta wage tracker, which is weighted by industry and gets closer to median wage gains, accelerated last month and will likely show a pickup again for August. The premium for job hoppers has been accelerating as well, which is a sign of pockets of labor shortages. 

Wage gains were strongest in financial activities, leisure and hospitality, construction and warehousing. The jump in leisure and hospitality coincides with the replacement of low-wage TPS workers and complaints about wage expectations in this month’s Beige Book.

Wages were weakest in the information sector, which had seen substantial gains due to the war for AI talent. Mining lost ground along with utilities. However, wages in the utility sector were the fastest growing this year due to the demand for electricity needed for data centers and increased use of AI models. 

Separately, the unemployment rate held steady at 4.1% in August, for the right reasons. The participation rate rebounded after losing ground consistently over the course of the year, another sign that labor market conditions are improving. It rose to 61.6% from 61.4%. That is the highest rate since May. The gains were driven by 16 to 24 year-olds, who had been sidelined earlier in the year. That could reflect seasonal adjustment due to the return to school but is still encouraging. 

The U6 or underemployment rate fell to 7.7% in August from 7.9% in July. The decline was driven by a fall in those forced to accept part-time instead of full-time work for economic reasons. The only true downside to the report was that the duration of unemployment rose by more than a week. 

The ranks of the long-term unemployed increased to 1.9 million, after dropping a bit in July. The mean duration of unemployment is the highest since February 2022, when we were still emerging from the pandemic recession. It is still much easier to get a job if you have a job. 

The new graduate unemployment rate reached 5.7% in June; it comes out with a lag. It is calculated by the New York Federal Reserve Bank but will likely fall once we get the actual data for August, although the jury is still out. The spread between the overall unemployment rate and that for new grads widened to levels more consistent with the early 2010s than six years into an expansion. 

The overwhelming majority of new grads, 89%, blame AI for the lack of hiring. There is little evidence that AI is displacing them. New graduates tend to be the last hired in a low-hire, low-fire, labor market, which we have seen for much of the year.  

The number of those who were out on vacation during August was the third lowest for the month on record. That underscores the bifurcated nature of consumer spending amidst high inflation. Discretionary spending among low- and middle-income households has been hit hard. 

The ranks of those who are out on parental leave jumped to the second highest for August on record. The elevated number of workers on parental leave reflects expanded leave benefits and the continued shift of births toward women in their 30s, rather than an increase in the aggregate birth rate.