Weekly Economic Trends and Indicators

The Headline:

The Bureau of Labor Statistics (BLS) reported last Friday that U.S. nonfarm payrolls increased by a seasonally adjusted 254,000 in September. This was well above expectations of around 150,000 and up from a revised 159,000 in August. The national unemployment rate edged down slightly to 4.1%.

The Details:

The following sectors saw the most positive change last month. Leisure and hospitality added 78,000 jobs last month compared to 53,000 in August. Health care and social services added 71,700 jobs compared to 53,900 in August. Professional and business services added 17,000 jobs compared to a 4,000 decrease in August. Of particular note was the fact that temporary help decreased 13,800 last month. This could mean that some temporary jobs turned into permanent positions. While it was an improvement, manufacturing was approximately flat—shedding only 3,000 jobs compared to a decline of 30,000 in August.

The Context:

No matter how you slice it, this was an excellent report. Wage growth was also significant, which could be interpreted as reflecting some lingering inflationary pressure. However, it is also possible that it is merely catching up with past inflation. At the September Fed meeting, Chair Jerome Powell was fairly confident that inflation was returning to their target level of 2%. To be precise, Powell indicated that the upside risk associated to inflation was less of a concern than the downside risk in the labor market.

So how does this stellar employment report affect the balance of risks? Probably not much. One of the challenges associated with reading the data in the current economic environment is distinguishing the signal from the noise. While there was a surge in employment this month, it may be a temporary response to the expected path of lower interest rates. The aftermath of Hurricanes Helene and Milton could have a negative impact next month. Labor data can be very noisy.

Due to Friday’s report, the probability of another ½ point rate cute from the Fed in November is essentially zero according to the CME FedWatch Tool. However, as of Friday, most people expect that the Fed will continue with a ¼ point rate cut at the next two meetings. The reasoning is as we have discussed previously: the current real (inflation adjusted) interest rate is still very restrictive. Even if the economy continues to fire on all cylinders, it will require several cuts to get back to neutral. Furthermore, to the extent that productivity gains are responsible for the improving economy, the threat of inflation may be less than earlier believed.

Interest rate sensitive industries such as manufacturing still need relief in the form of further rate cuts. While it was good to see stable employment in manufacturing as opposed to the declines we have been used to, it will take lower rates and a weaker dollar to help the local economy.

Next week: Local labor market update