By Lucia Mutikani
WASHINGTON, Sept 4 (Reuters) - U.S. job growth accelerated sharply in August while the unemployment rate held steady at 4.1%, suggesting an improvement in the labor market after recent struggles, keeping an interest rate increase from the Federal Reserve this month on the table.
The larger-than-expected increase in nonfarm payrolls last month reported by the Labor Department in its closely watched employment report on Friday reflected a rebound in leisure and hospitality employment after
two straight monthly declines, as well as a reversal of the drag from local government education.
The unemployment rate was unchanged despite the labor force increasing by 683,000, adding another layer of strength to the report. Financial markets boosted rate hike bets at the U.S. central bank's September meeting.
The odds had been dialed back after Fed Governor Christopher Waller said at a Reuters NEXT Newsmaker event on Thursday that he was inclined to argue in favor of keeping rates steady if upcoming data confirmed inflation pressures were cooling.
"The American labor market is in good condition heading into the end of the year," said Joe Brusuelas, chief economist at RSM. "The data does lend support to the hawks at the Fed who are growing impatient with inflation."
Nonfarm payrolls surged by 162,000 jobs last month, the largest gain in five months, after an upwardly revised rise of 21,000 in July, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would increase by 56,000 after a previously reported drop of 23,000 in July. June payrolls were revised up by 11,000 to 20,000.
Payroll estimates for August ranged from as low as a loss of 25,000 jobs to as high as a gain of 121,000. Labor market momentum had decelerated after surging in the spring, partly blamed on the oil price shock and supply chain strains from the U.S.-led war with Iran.
Job gains averaged 71,000 per month in the three months through August compared to a loss of 9,000 over the same period in 2025.
Leisure and hospitality employment surged 62,000 last month, with payrolls at restaurants and bars increasing by 59,000 jobs. Local government education added 42,000 jobs, erasing a decrease in the prior month. Overall government payrolls rebounded by 35,000, and together with the leisure and hospitality sector accounted for more than 60% of the gain in employment.
Some economists said this suggested difficulties adjusting the data for seasonal fluctuations boosted August payrolls after restraining job growth in July.
Manufacturing payrolls increased 16,000, while construction added 22,000 jobs. Healthcare employment rose 13,000. That was, however, slower than the average monthly gain of 32,000 over the last year, and could reflect the revocation of Temporary Protected Status for hundreds of thousands of Haitian immigrants, which impacted their work permits.
AVERAGE WORKWEEK LENGTHENS
Professional and business services payrolls rose 10,000. But the information sector shed 23,000 jobs while the financial activities industry lost 11,000 positions, mostly in finance and insurance, which economists attributed to the adoption of artificial intelligence for some work roles. The share of industries reporting job growth increased to 55.6%, the highest since December 2024, from 52.8% in July. The average workweek lengthened to 34.4 hours, the longest since March 2024, from 34.3 hours in July.
Despite the surge in payrolls and low unemployment rate, the labor market is not a source of inflation, with wages increasing 3.1% in the 12 months through August after rising 3.2% in July.
Financial markets were pricing in a roughly 62% chance of a quarter-percentage-point rate hike at the Fed's September 15-16 meeting, up from about 49% on Wednesday, CME's FedWatch tool showed. The Fed's benchmark overnight interest rate is currently in a 3.50%-3.75% range. Next week's Consumer Price Index report for August will determine whether the Fed raises rates or not.
Stocks on Wall Street were trading lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. They have been driven higher by concerns about inflation and lack of forward guidance from the Fed, which economists see as a problem for the central bank.
Rising yields drove the 30-year fixed mortgage rate to a more than one-year high of 6.71% this week, data from mortgage finance agency Freddie Mac showed on Thursday, which could further undermine a struggling housing market.
"Ironically, a rate hike may generate less market volatility than another meeting in which policymakers choose to stand pat," said Jeffrey Roach, chief economist at LPL Financial.
The Trump administration is cracking down on immigration, through deportations and revocations of TPS, shrinking the labor pool. That has drastically reduced the number of jobs economists say the economy needs to create to keep up with growth in the working-age population. Economists estimate the so-called break-even rate at between zero and 50,000 jobs per month.
Reduced labor supply amid retirements and slow population growth because of the Trump administration's immigration crackdown is keeping the unemployment rate lower.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rebounded 0.2 percentage point to 61.6% in August. It remained below 62.1% at the start of the year.
Household employment increased 569,000 in August, recovering after two straight monthly declines. The number of people working part-time for economic reasons decreased 414,000.
But more people experienced long bouts of unemployment, with the number of those out of work for 27 weeks or more rising 159,000. The median duration of unemployment increased to 11.4 weeks, not too far from a 4-1/2-year high touched in May. It was up from 10.5 weeks in July.
"Even if the household survey's measure of employment continues to improve, further scope for participation to at least partially rebound leaves room for a modest rise in the unemployment rate by year-end," said Tom Porcelli, chief economist at Wells Fargo.
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)
