The unemployment rate edged up to 3.9% in October on weaker-than-expected payroll growth
The unemployment rate edged up to 3.9% in October — its highest point in nearly two years. The jobless rate was 4.0% in January 2022 before gradually receding to its cyclical low of 3.4% last April.
Perhaps more notable than the 0.1% uptick in the unemployment rate was a further cooling in the pace of job creation. Nonfarm payrolls rose by 150,000 in October, which was a moderate miss compared to forecasts, and roughly half the revised September gain. Coming off an unexpectedly strong September report, a weaker print had been widely anticipated. Revisions to the preceding two months shaved an additional 101,000 off the net pace of job creation, pulling the net gain down to a paltry 49,000.
Monthly payroll gains have seesawed since June with comparatively weak reports followed by outsized gains the following month. It’s quite possible that trend could extend into a stronger increase next month, as the ripple effects of the recently resolved UAW strike undoubtedly played a meaningful role in the 35,000 manufacturing jobs lost in October. With activity ramping back up, an outsized uptick in manufacturing payrolls in the near term wouldn’t be surprising.
Regardless of the potential skew from temporary factors, the pace of job creation has slowed. Over the last three months, job creation has averaged about 200,000 — well below the 342,000 monthly pace for the comparable period a year ago. Similarly, the average monthly gain of 239,000 this year significantly lags the 426,000 monthly pace for the comparable period in 2022. It’s also quite possible that material revisions to monthly payrolls could be forthcoming, as was the case in 2022. Whether those revisions may help, hurt, or simply smooth the monthly data remains to be seen.
We’re seeing the lagged effect of Fed tightening continuing to permeate the economy, pushing back against the strength of the consumer sector. Given the typical lag time, it’s highly likely that there’s more to come. Further, it’s the recognition of that delayed effect of prior tightening that’s giving the Fed some ability to sit tight for now despite the reacceleration in growth last quarter.
Fed policymakers looking for evidence of progress should also be encouraged by signs of easing in the pace of wage growth. Average hourly earnings increased by 0.2% in October, in line with expectations. The 12-month increase held steady at 4.1% but remains in a gradual downtrend since peaking at 5.9% in March 2022. Coupled with a 0.3 decline in average weekly hours worked over the past 12 months, average weekly earnings increased by 3.2% over the past year, a pace that would appear to be more sustainable within the scope of the Fed’s 2% inflation mandate, particularly if productivity gains can be sustained.
Whether the convergence of strong consumer demand, a cooling labor market, and gradually receding inflation will culminate in a successful soft landing for the economy remains to be seen. Leading economic indicators are still negative, the yield curve remains inverted, and credit conditions are tightening. The task was never going to be easy for the Fed, and it’s still too soon to conclude that policymakers have stuck the landing.
A soft landing certainly isn’t impossible, but it’s still far from guaranteed. The tug of war between consumer spending as the primary driver of growth and the Fed’s attempts to cool demand continues to go back and forth. The GDP report was a win for consumers, but recent labor market trends point toward meaningful progress by the Fed’s tightening efforts and slower growth ahead.
The bottom line? The labor market is cooling but isn’t cold. It appears that the slowdown in job creation and gradual uptrend in the jobless rate could provide sufficient cover for the Fed to stand pat for now, so long as underlying inflation pressures also continue to abate. The combination could provide a near-term goldilocks background for investors, but any enthusiasm should be tempered by the recognition that the economic conditions are ripe for further cooling ahead.
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