The latest September jobs report has brought positive news for the economy, indicating a strong job growth and a steady labor supply. Despite this, the U.S. Federal Reserve policy makers may face some challenges due to the current volatile financial markets backdrop.
Impressive Job Growth
In September, the economy added an impressive 336,000 jobs. The unemployment rate held steady at 3.8%, while the participation rate remained at 62.8%. There was a slight easing in wage growth, which stood at 4.2% compared to the previous year.
Sector-Wise Job Additions
The private sector saw a significant increase in employment, with 263,000 jobs added across various sectors. The government sector also contributed to the job growth, adding 73,000 jobs, primarily consisting of teachers for the new school year.
Among goods producing industries, construction saw an increase of 11,000 jobs, while manufacturing added 17,000 jobs. The services sector witnessed its largest gain since January, with 234,000 jobs created. This growth was driven by strong hiring in leisure and hospitality (96,000 jobs), healthcare (66,000 jobs), and retail (20,000 jobs). With the exception of the information sector, where strikes may have affected employment, gains were observed across all major sectors.
Despite the positive job growth numbers, the volatile financial markets may pose a challenge for U.S. Federal Reserve policy makers as they navigate their monetary policy decisions.
Labor Market Update
The labor market continues to show signs of stability, with hours worked remaining unchanged at pre-pandemic levels. This indicates that employers are not reducing the number of hours for workers despite the normalization process after the peak utilization rates seen during the pandemic.
Private sector industries are also adding jobs, as shown by the rebound in the employment diffusion index. After hitting a low of 53% in July, the index rose to 64% in September, indicating an increase in job creation.
The unemployment rate remained steady at 3.8% in September, while the labor force participation rate held at 62.8%, which is a post-pandemic high. Particularly encouraging is the participation rate among the prime-age cohort (25-to-54-year-olds), which remained at 83.5%, the highest it has been in 21 years. This stronger labor supply helps alleviate wage pressures.
Speaking of wages, average hourly earnings saw a modest increase of 0.2% compared to the previous month. This is the lowest reading since February 2022 and falls well below the three-month trailing average of 0.4%. As a result, wage growth moderated to 4.2% year over year, its slowest pace since June 2021. While still above the Federal Reserve’s comfort zone, recent data suggests a gentle slowdown in labor-cost pressures as the labor market rebalances. This moderation in wage growth is expected to continue into 2024 as labor market conditions soften.
Before the recent bond market selloff, the labor market remained tight, and there was no indication of a decline in employment. However, there are some headwinds on the horizon. The United Auto Workers strike is expected to weigh on job growth in October, while a decrease in consumer spending and more cautious business activity, due to rapidly tightening financial conditions, will lead to slower labor demand.
Overall, despite these challenges, the labor market is currently showing resilience and signs of stability.
The Future of Job Growth
The September jobs report has certainly caught our attention, but we must remain cautious as there is a possibility that the year could end with negative job growth. The combination of surging interest rates and tightening financial conditions has increased the likelihood of an economic breakdown. In fact, we now believe that the odds of a recession over the next 12 months have risen from 40% to around 50-55%.
Our stance remains firm: the Federal Reserve’s tightening cycle is complete. The disinflationary trend is progressing at a faster pace than anticipated by the Fed. Additionally, while the labor market has proven resilient, it is not contributing to inflationary pressures as much as expected. With the recent rapid tightening in financial conditions, accompanied by a surge in yields following this report, there will be less need for further monetary policy tightening.
Paradoxically, the strong jobs numbers may actually lead policymakers to reevaluate their “higher for longer” approach. The possibility of rates drifting even higher means that the primary anchor will likely be the Fed’s response to tightening financial conditions and an anticipated slowdown in economic activity. The forward guidance from the Fed regarding a potential shift to a less aggressive stance, or adjustments to their balance sheet normalization process, could play a crucial role in influencing long-term rates.
