Shocking jobs report
But overall labor-market picture is mixed.
Nonfarm payrolls surged by a much stronger-than-expected 336,000 jobs in September (consensus at 170,000, Federated Hermes at 144,00), marking the largest monthly gain since January. In addition, previously reported July and August gains combined were revised higher by 119,000 jobs, which means that payroll employment soared by a sizzling 455,000 jobs last month. That’s consistent with the ongoing strength in initial weekly jobless claims, whose September survey week was at an 8-month low, and the lagging JOLTS report, which surprisingly leapt in August to more than 9.6 million job openings. While private payrolls were also stronger than expected, rising by 263,000 jobs in September (consensus at 160,000), July and August were revised down by a combined 12,000.
Mixed picture But household employment rose by only 86,000 workers in September, down from a much-stronger gain of 222,000 jobs in August. And the ADP private payroll survey in September was the weakest since January 2021, falling by half from August levels to only 89,000 jobs. Challenger layoffs rose 58% from a year ago in September. Finally, temporary help has now lost jobs for the eighth consecutive month in September, a negative trend that has presaged the last four recessions in the U.S. economy.
Sudden reversal coming? The United Auto Workers (UAW) strike in Detroit, which started on September 15, wasn’t captured in the nonfarm payrolls report. But both workers and the Big Three are digging in. Bloomberg estimates that if all 150,000 union employees eventually struck or were locked out by management, the derivative impact across the entire U.S. economy could result in the temporary loss of about 750,000 jobs. So, the surprisingly strong September jobs report may represent the high-water mark, with potential auto-related weakness in the pipeline.
Another Fed hike on tap The Fed skipped an interest-rate hike at its September 20 policy-setting meeting after executing a quarter-point hike to a 22-year high (a target range of 5.25-5.50%) on July 26. Given today’s strength in September’s jobs report and the powerful upward revisions in July and August, we expect the central bank to hike rates at its November 1 meeting.
Benchmark 10-year Treasury yields have soared from 3.75% in mid-July to a new 16-year high of 4.88% earlier today, as investors have begun to anticipate the Fed’s higher-for-longer strategy to combat stubbornly high inflation. Over this same period, the combination of tighter monetary policy and rising Treasury yields has rallied the dollar versus the euro by more than 7% to 1.05, while the S&P 500 has corrected by more than 8% to 4,220 this morning.
Important labor-market indicators are mixed:
- ADP private payroll survey It added the fewest jobs in September since January 2021, rising by 89,000 (consensus at 150,000)—roughly half the upwardly revised gain of 180,000 posted in August. While leisure & hospitality hiring was strong (92,000), manufacturing, trade/transportation and professional/business services all lost jobs last month. Also, job stayers experienced their slowest wage growth in two years, 5.9% year-over-year (y/y), in September. Job changers wages increased 9.0% y/y.
- Initial weekly jobless claims This high-frequency leading employment indicator declined to an 8-month low of 202,000 for the September survey week that ended September 16. Continuing claims have fallen 10% over the past five months, and the 4-week moving average is now at a 7-month low, dropping 18% over the past three months.
- Challenger job cuts More than 47,000 layoffs in September represents a 58% increase from a year ago, though the pace did decline sequentially by 36% from August. With the important Back-to-School season winding down, retailers cut almost 15,000 jobs last month, accounting for nearly one-third of total layoffs in September.
- Lagging Job Openings & Labor Turnover Survey (JOLTS) Surprisingly leapt 7.7% month-over-month (m/m) in August to a much higher-than-expected 9.61 million job openings (consensus at 8.8 million), compared with 8.92 million in July. However, this is still down 20% from a record 12 million job openings in March 2022. There are now 1.5 job openings for every unemployed worker (lowest since September 2021), down from a peak of 2.0 in March 2022. With 3.64 million voluntary quitters in August, the quits rate held steady at a cycle low of 2.3%, the lowest level since 2020, which suggests that workers are less confident today in their ability to find another job. This metric peaked at 3.0% in April 2022.
Wage inflation and hours worked flattish Average hourly earnings were unchanged at a 0.2% m/m gain in September (a tick below consensus), which translated into a 4.2% y/y increase, down a tick both from August levels and consensus expectations for September. Average weekly hours worked were also unchanged at 34.4 in September, although down from 34.5 in February. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before staff.
Unemployment and participation rates flat, labor impairment declines Household employment added a modest 86,000 jobs in September, down from solid gains of 222,000 in August, 268,000 in July and 273,000 in June. The number of unemployed people rose by 5,000 in September, compared with a sharp increase of 514,00 workers in August, versus declines of 116,000 in July and 140,000 in June.
As a result, the unemployment rate (U-3) was a disappointing 3.8% in September, unchanged from August’s 18-month high. The Fed’s own forecast from its September Summary of Economic Projections is that it will remain at 3.8% by year-end 2023 and will rise to 4.1% by year-end 2024. The labor impairment rate (U-6) ticked lower to 7.0% in September, down from a 15-month high of 7.1% in August. But that’s still up from the cycle low (dating back to 1994) of 6.5% in December 2022.
The civilian labor force rose by a muted 90,000 workers in September, down from gains of 736,00 in August, 152,000 in July, 133,000 in June and 130,000 in May. The participation rate was unchanged in September at a post-pandemic high of 62.8%, compared with 62.6% in each of the previous five months. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery widens The unemployment rate for high wage-earning workers declined to 2.1% in September from 2.2% in August, but that’s still above September 2022’s cycle low of 1.8%. The unemployment rate for low wage-earning workers rose to 5.5% in September from 5.4% in August, and from 5.2% in July (compare to its 31-year low of 4.4% in November 2022).
- Temporary help (an important leading employment indicator) has lost jobs in each of the past eight months, dropping 4,000 jobs in September, compared with losses of 13,000 in August, 17,000 jobs in July and 36,000 in June. The last four U.S. recessions have faced similar negative trends.
- Government hiring surged by 73,000 jobs in September (paced by 6,000 federal hires), compared with 50,000 in August and 91,000 in July. September tends to be quirky, due to the start of the new school year and end-of-summer layoffs. Last month, state hiring added 29,000 jobs and local hiring totaled 38,000 workers.
- Manufacturing was stronger-than-expected, adding 17,000 jobs in September (consensus at 5,000), versus a gain of 11,000 jobs in August and a loss of 2,000 in July. Although the ISM manufacturing index has been in contraction territory under 50 in each of the past 11 months at 49.0 in September, it’s up from 46.0 in June.
- Construction remains solid, adding 11,000 jobs in September, 36,000 in August, 12,000 in July, 29,000 in June and 25,000 in May. Although mortgage rates more than doubled from 3% to a 22-year high of 7.6% over the past two years, there is still enormous pent-up demand for shelter.
- Retail added 20,000 jobs in September, up from breakeven in August, a gain of 13,000 in July, and a loss of 23,000 in June. The important spring “Marpril” season was soft, with retail sales rising by a tepid 1.7% y/y, and Back-to-School sales have also started soft with a gain of only 2.1% y/y during June, July, and August.
- Leisure & hospitality leapt with 96,000 new workers in September, more than double the 44,000 added in August, compared with 38,000 jobs in July, 26,000 in June and 28,000 in May.