Investors breathed a sigh of relief on Aug. 30 when it was revealed that U.S. employment growth nosedived in August.

Cheering for a slowdown in employment sounds counterintuitive, but in the context of today’s market, it makes sense.

Payroll processor ADP reported that private-sector employment grew by a paltry 177,000 in August. That’s less than half of July’s hiring pace of 371,000 and well below economists’ expectations of 195,000.

Nela Richardson, ADP’s chief economist, soothed investors’ concerns when she wrote, “This month's numbers are consistent with the pace of job creation before the pandemic” and that, “After two years of exceptional gains tied to the recovery, we're moving toward more sustainable growth in pay and employment.”

Corporate profits, stock markets, and home sales have all reset to pre-pandemic levels. The only holdout has been the jobs market, but the tide is finally turning.

Why inflation remains stubbornly high

Employment growth is usually good for the economy. But during periods of high inflation, economists fear it could make matters worse.

A strong labor market leads to higher wages because there are plenty of job openings and fewer available workers. To attract workers, companies increase wages.

To compensate for their added costs, companies often raise prices on goods and services. Inflation worsens, central banks step in by raising interest rates, and the economy cools. In a worst-case scenario, we slide into recession.

The problem is that the Fed has already used up most of its ammo—it’s shut off the money printer and raised interest rates 11 times in the past 17 months.

But inflation remains uncomfortably high.

Economists believe that’s probably because the labor market is still creating millions of jobs. Wages are rising. And consumers are paying more for lattes, vet visits, and automobiles.

The Fed chases its own tail

Ironically, Wall Street is worried about “too many jobs” causing inflation when it profited off asset bubbles in stocks and real estate. This asset price inflation made financial securities and other investments too expensive for the ordinary person.

Asset price inflation was enabled by the Fed, which kept interest rates anchored to zero for years. Cheap money encourages more people to invest in riskier assets and speculate on the stock market.

When the pandemic hit, the federal government ran massive deficits and the Fed printed nearly $7 trillion to keep the economy from imploding.

All that spending created runaway inflation as more dollars chased less goods. America’s inflation problem reached its climax in June 2022 when the consumer price index hit 9.1% from a year earlier—the highest in over 40 years.

In essence, the Fed created the inflation it’s fighting now. Workers have to suffer for the Fed to get inflation back under control.

So far, there’s no evidence that the labor market is tanking. But job growth is slowing, which is one of the first signs that the market is shifting.

The ADP report is usually a warm-up to the official government nonfarm payrolls report, which is released two days later.

Nonfarm payrolls offer a broader measure of employment growth for the month. Like the ADP report, nonfarm payrolls are expected to show a slowdown in hiring.