Nonfarm payrolls rose solidly in August amid an otherwise slowing economy, while the unemployment rate ticked higher as more workers re-entered the workforce, the Bureau of Labor Statistics reported on Friday.

The economy added 315,000 jobs this month, just below the Dow Jones estimate of 318,000 and well below July’s 526,000 and the lowest monthly gain since April 2021.

The unemployment rate rose to 3.7%, two-tenths of a percentage point higher than expected, mainly due to a rise in the labor force participation rate to 62.4%, the highest level for the year. A broader measure of unemployment, which includes discouraged workers and those who have part-time jobs for economic reasons, rose to 7% from 6.7%.

Wages continued to rise, albeit slightly less than expected. Average hourly wages rose 0.3% for the month and 5.2% year-on-year, both 0.1 percentage point below estimates.

Professional and business services led the payroll increases at 68,000, followed by healthcare at 48,000 and retail at 44,000. Leisure and hospitality, a leading sector in the pandemic-era job recovery, rose just 31,000 this month after averaging 90,000 for the previous seven months of 2022. The unemployment rate for the sector rose to 6.1%, the highest since February

Manufacturing was up 22k, financial activities were up 17k and wholesale trade was up 15k.

Markets reacted positively to the numbers, with major equity indices posting strong gains and government bond yields falling.

Four experts react to the strong job report from August

“There’s something for everyone in this report,” said Michael Arone, chief investment strategist at State Street Global Advisors. “This report supports the Fed’s ability to stage a soft landing. Markets like it.”

The jobs numbers present a dilemma for a Federal Reserve trying to control inflation.

Inflation is moving at almost its fastest pace in over 40 years as a combination of supply and demand imbalances, massive stimulus from the Fed and Congress and the war in Ukraine have pushed up the cost of living.

However, the labor market has remained strong even as other aspects of the economy have weakened. Residential construction, in particular, is likely to be in a recession.

“This is a unique time where we still have a relatively tight labor market, where there is still job growth, but companies have started to announce hiring freezes, some companies have announced layoffs,” said Liz Ann Sonders, Chief Investment Strategist at Karl Schwab. “This could very likely be a recession where you don’t see the kind of carnage in the job market that you see in most recessions.”

These pay rises came amid rising inflation and concerns about a slowing economy, which reported negative GDP numbers for the first two quarters of the year, widely seen as a telltale sign of a recession.

The Fed has tackled the inflation problem with a series of rate hikes totaling 2.25 percentage points that are expected to continue into next year. In recent days, central bank leaders have warned that they have no intention of reversing monetary tightening and expect interest rates to remain high “for some time” even if they stop raising rates.

Futures markets withdrew expectations of a third straight rate hike by 0.75 percentage points at the September meeting. The probability of this move was 62% at 10am ET, up from 75% on Thursday.

A key channel through which the Fed looks for policy action is through the labor market. Adding to the robust hiring rate, job openings are outstripping available labor by almost 2 to 1, putting wages under pressure and creating a feedback loop that has pushed up prices not just on gas and food, but also on housing and a host of other expenses drives.

There were some weaknesses in the August numbers.

Full-time jobs fell by 242,000 while part-time jobs rose by 413,000, according to the household survey, which the BLS uses to calculate the overall unemployment rate.

The job report is “not strong enough to nudge them into more aggressive rate hikes and not weak enough to slow them down,” Arone said. “I don’t think today’s jobs report will change anything about the Fed’s path.”

August payrolls are generally more volatile than other months. In 2021, the original estimate of 235,000 was finally revised down to 483,000. Over the past decade, the average revision for August has been 82,700 higher.

The BLS cut the number of payslips from 398,000 to 293,000 in June and from 528,000 to 526,000 in July, a total net decrease of 107,000 from previous estimates.