The September jobs report has provided a positive outlook on the possibility of a recession, showcasing robust job growth and a steady labor supply. However, this report may present a challenge for U.S. Federal Reserve policy makers given the current volatile state of financial markets.
Impressive Job Growth
In September, the economy added an impressive 336,000 jobs. Both the unemployment rate and participation rate remained steady at 3.8% and 62.8% respectively. Wage growth slightly eased to 4.2% compared to the previous year, indicating steady progress.
Private Sector Employment
The private sector experienced a significant increase in employment, with 263,000 new jobs added across various industries. Furthermore, the government sector contributed an additional 73,000 jobs, primarily in response to the demand for teachers at the start of the new school year.
Strong Performance in Industry Sectors
Industries involved in goods production displayed consistent growth, as seen in the rise of payrolls in construction (11,000 jobs) and manufacturing (17,000 jobs). Moreover, the services sector witnessed its largest gain since January with 234,000 new jobs, driven by robust hiring in leisure and hospitality (96,000 jobs), healthcare (66,000 jobs), and retail (20,000 jobs). Apart from the information sector, which may have been affected by strikes, employment gains were observed across all major sectors.
The September jobs report provides a promising sign for the stability of the economy, characterized by strong job growth and favorable labor market conditions. However, it is important to keep in mind the potential impact of financial market volatility on future economic trends.
Employment Stability and Labor Market Conditions
The current state of the labor market indicates a steady level of work hours, suggesting that employers are not reducing working hours post-normalization from the peak utilization rates experienced during the pandemic. In addition, the employment diffusion index, which measures job growth across private sector industries, rebounded from a low of 53% in July to 64% in September.
Unemployment and Labor Force Participation
The unemployment rate held firm at 3.8% in September, with no significant changes observed. Similarly, the labor force participation rate, which tracks the proportion of individuals actively engaged in the labor market, remained unchanged at 62.8%. Notably, this rate reached a post-pandemic high. Likewise, the participation rate for prime-age individuals (25 to 54 years old) stayed steady at 83.5%, marking its highest level in 21 years. This increase in labor force participation is encouraging as it helps alleviate wage pressures.
Moderate Wage Growth and Labor Market Rebalancing
Average hourly earnings only rose by a moderate 0.2% compared to the previous month, marking the lowest reading since February 2022. This figure is well below the three-month trailing average of 0.4%. Consequently, year-over-year wage growth moderated by 0.1 percentage point to 4.2%, its slowest pace since June 2021. Although wage growth remains above the Federal Reserve's comfort zone, recent data suggests a gradual easing of labor-cost pressures due to signs of labor market rebalancing. This trend of moderation is expected to continue into 2024 as labor market conditions soften.
Impact on Job Growth and Labor Demand
Prior to the recent bond market selloff, the labor market had consistently been tight without any signs of employment contraction. However, upcoming challenges such as the United Auto Workers strike are likely to weigh on job growth in October. Additionally, concerns over consumer spending and cautious business activity, coupled with rapidly tightening financial conditions, are expected to slow down labor demand. As a result, the labor market outlook for the near future is anticipated to face some headwinds.
The Possibility of Negative Job Growth in the Coming Months
September’s jobs report is exciting, but it’s entirely possible that we will see a month with negative job growth before the year ends.
The economy is currently facing challenges as interest rates surge and financial conditions tighten. These factors increase the likelihood of a breakdown in the economy. As a result, recession odds for the next 12 months have risen from 40% to around 50-55%.
The Fed's Tightening Cycle and Disinflationary Process
We continue to believe the Fed’s tightening cycle is complete. The disinflationary process is running ahead of the Fed’s forecast.
Inflation pressures are proving to be less significant due to the resilience of the labor market. Furthermore, rapid tightening in financial conditions, driven by a surge in yields after the latest jobs report, will reduce the need for further monetary policy tightening.
Calibrating the "Higher For Longer"
If anything, these strong jobs numbers will likely push policymakers to focus on calibrating the “higher for longer” mantra.
Although the possibility of rates drifting even higher still exists, policymakers should shift their attention to how the Fed responds to tightening financial conditions and a potential easing in economic activity. Forward guidance from the Fed, indicating a willingness to adopt a less hawkish stance or make adjustments to its balance sheet normalization process, could play a significant role in guiding long-term rates.
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