Weekly Economic Trends and Indicators

The Headline:

On Friday, the Bureau of Labor Statistics (BLS) reported that nonfarm payrolls in the U.S. increased by 336,000 jobs in September—well above the expectations of most analysts. Also of note in the report, the national unemployment rate was unchanged at 3.8 percent, and the labor force participation rate was unchanged at 62.8 percent (0.5 percent higher than a year ago).

The Details:

This report is at odds with the ADP employment report released earlier in the week, which reported an increase of 89,000 jobs—well below expectations. (The ADP report is published by the ADP Research Institute, affiliated with the payroll firm ADP). In the past, the ADP report tracked closely with the BLS. However, recent methodological changes in the ADP report have made it more independent. Many analysts still look to the ADP report as an indicator of where the BLS will come in, but that is less reliable now—and certainly, this month is a case in point. While the headline number from the BLS is very robust, a closer look reveals that there are some trends under the surface that we do not want to ignore. By far the largest job growth was in the leisure and hospitality sector (96,000 jobs). This is something we have seen repeatedly this year. Nationwide, this sector has now reached pre-pandemic levels, which is encouraging. Coming in second was health care and social services at 65,900 jobs. Expect this to continue to trend upward with an aging population. However, most other sectors were up modestly or little changed. Of interest to the local economy, manufacturing was only up 17,000 jobs nationwide. It will be a few weeks before we see how the Quad Cities compared to the rest of the nation last month. In recent weeks, we have chronicled the slowing of the manufacturing economy, and it appears that it is continuing. Higher interest rates and a stronger dollar are to blame.

The Context:

Conventional wisdom says that a blockbuster labor report like we just saw would lead to higher interest rates. However, the conventional wisdom might be wrong this time. According to the CME FedWatch Tool, the probability of a rate hike decreased on Friday from 20.1% the day before to 11.2% to end of the week. Why? Perhaps the most important number in the report was not the headline, but the fact that wage growth continues to be consistent with lower inflation. Analysts took comfort in the modest 0.2 percent increase in average hourly earnings in the report (and the ADP report also showed declining wage growth). Evidence of a soft landing, perhaps? With slowing wage growth, so the logic goes, the Fed may be able to pause in November and let past rate increases continue to work their way through the economy without risking policy error by pushing interest-sensitive sectors (like manufacturing) into recession. A decline in inflation and an end to rate hikes would be a breath of fresh air to interest rate-sensitive economies like ours. We will continue to watch inflation data to see if these positive signs continue.

Next week: October is Manufacturing Month… Special focus on manufacturing in the Quad Cities for the next two weeks.