The unemployment rate slid as expected in August after a surprise increase the prior month

• The unemployment rate fell to 4.2% in August.
• The US also added 142,000 jobs in August, below the forecast of 164,000.
• The data is a crucial input as the Fed decides how much to cut interest rates later this month.

Unemployment slid, as expected, to 4.2% in August after a surprise increase to 4.3% in July.

However, US nonfarm payrolls came in weak: The economy added 142,000 jobs, missing the consensus expectation of 164,000.

The unemployment figure solidifies outlooks for an economic soft landing and is unlikely to derail expectations for a Federal Reserve interest-rate cut later this month. Investors are likely to focus instead on the size and pace of those cuts.

"Friday's jobs report shows that the labor market is continuing at a sturdy but slowing pace, and that gives the Federal Reserve the ability to cut interest rates by either 25 or 50 basis points at the September meeting," Carol Schleif, the chief investment officer of BMO Family Office, said in commentary on Friday. "Part of the Fed's decision on how deep of a rate cut to initiate in September will also depend on the August CPI report, which is released next week."

The July report included a surprise unemployment-rate increase and a sizable nonfarm-payroll miss that renewed recession worries and sparked a sharp stock sell-off. Data later in the month stabilized outlooks, and equities rebounded.

The latest employment report indicated that job growth was much weaker earlier in the summer than initially reported, with revisions to June's and July's payrolls suggesting the economy added 86,000 fewer jobs over those two months than the Bureau of Labor Statistics had estimated.

"Rarely has there been such a make or break number — unfortunately, today's jobs report doesn't entirely resolve the recession debate," Seema Shah, the chief global strategist for Principal Asset Management, wrote in a statement.

How much the Fed will cut rates this month is still an open question.

"For the Fed, the decision comes down to deciding which is the bigger risk: reigniting inflation pressures if they cut by 50bps or threatening recession if they only cut by 25bps," Shah said. "On balance, with inflation pressures subdued, there is no reason for the Fed not to err on the side of caution and frontload rate cuts."

Short-term bond yields fell after the report's release, suggesting investors are eagerly awaiting the Fed's interest-rate cuts. Shortly after the release, the CME FedWatch tool showed roughly equal odds of a 25-basis-point cut and a 50-basis-point cut at the coming Fed meeting.

Average hourly earnings rose to $35.21 an hour in August, or by 3.8% from August 2023, a speed-up from the 3.6% year-over-year increase in July.

Employment in construction increased by 34,000 in August. Leisure and hospitality employment surged by 46,000. Manufacturing employment took a large dip, dropping by 24,000.

Other labor-market data published Wednesday indicates work opportunities have continued to slow. Job openings fell to 7.7 million in July from 7.9 million in June. More people quit a job in July than in June, with about 3.3 million quits in July compared with about 3.2 million in June. The layoffs-and-discharges rate also ticked up to 1.1% in July from 1% in June.

That data could also be important for the Fed's interest-rate decision.

"The labor market is past moderation and trending toward deterioration," Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said in commentary on Wednesday. "The Federal Reserve has indicated that it has shifted some attention away from inflation and toward the health of the labor market, which is good, but it needs to take action soon."

This is a developing story. Please check back for updates.