Posted by Jeffrey J. Roach, PhD, Chief Economist
Friday, October 7, 2022
Mixed Feelings
Many analysts are likely having mixed feelings from reading the September jobs report. Yes, the persistent gain in jobs could keep alive the dream for a soft landing. But, the tighter labor conditions will likely keep the Federal Reserve (Fed) on track for another aggressive rate hike next month.
The economy added 263,000 payroll jobs in September, the slowest monthly gain since December 2020 when the economy outright shed jobs. The September unemployment rate fell to 3.5% from 3.7% last month and only a tick higher than the all-time low of 3.4% in 1969.
As shown in the LPL Chart of the Day, both the three- and six-month moving averages gently declined in September as the labor market cooled. The orderly decline in the longer-run averages is the “Goldilocks” scenario the Fed seeks. Overall, this is a good report for the likelihood of a soft landing but a frustrating report for those looking for the Fed to ratchet down from 0.75% rate hike increments.
Frustrating
The decline in the unemployment rate will likely frustrate the Fed as tight labor markets could drive up wages. But that doesn’t seem to be happening yet. Average hourly earnings were up 5% from a year ago, growing at a slower pace than inflation and putting a dent in consumer purchasing power. From an earlier report, job openings are still elevated and keeping labor markets tight but the number of openings is decreasing as the overall economy cools. Manufacturing and construction sectors continue to add jobs this month. However, retail jobs fell in September for the first time since May and could indicate falling demand for consumer goods.
How About a Participation Award?
One of the challenges right now with the labor market is the number of individuals who were part of the labor force in early 2020 but stopped working and are still out of the labor force. Except for the 45 – 55 year olds, the latest participation rates are below pre-pandemic rates, suggesting that the labor market could loosen in the coming months if more re-enter the workforce. We think the high inflationary environment will eventually bring those people back into the workforce who had taken a “gap year” during the pandemic.
Conclusion
The September report has something for both the bulls and bears. The orderly slowdown in job growth throughout this year is a welcomed sign compared to other highly volatile financial data. But, the tightness in the labor market will frustrate the Fed, adding risk that the low unemployment rate could eventually translate into higher wages. In sum, this report will not likely change the current path of Fed tightening since current inflation pressures have not convincingly eased enough for policy makers. We expect a 0.75% increase to the funds rate in November and a 0.50% increase in December as inflation likely decelerates in the coming months.
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