Job openings top estimates amid sharp drop in manufacturing

Job openings edged up in September as labor demand remained strong, the Bureau of Labor Statistics reported on Wednesday. The manufacturing sector, according to a separate report from the Institute for Supply Management, declined at a faster rate than expected on falling employment and new orders. Both key data points came only hours ahead of the Federal Reserve’s decision on interest rates at its meeting. We do not expect the recent data release to alter the decision to keep the policy rate at the same level. But strong labor market data together with the recent blockbuster gross domestic product figure for the third quarter should keep the Fed’s foot on the brake pedal for a quite a while before thinking about a cut in rates. While the Fed is likely done with this hiking cycle, in our estimate, it will continue to sound hawkish to alleviate any risk of inflation spiraling out of control again. We should expect the Fed Chairman Jerome Powell to state that the central bank will keep all options on the table, even if that means another hike. Still, the data added to the reasons why we think that the Fed should not hike again. The upside surprise in job openings was offset by a downward revision to August’s number, keeping the openings-to-unemployed ratio at 1.5, inching up from 1.49 earlier. Yet that 1.5 ratio was much lower than the 1.96 at the beginning of the year. There is still a long way to the 1.2 level of before the pandemic. Still, the figure was encouraging enough that we should expect a further loosening of the labor market. Most of the increase came from leisure and hospitality openings, which are often short-term demand. The job quit rate—a proxy for labor market tightness—stayed at 2.3% for the third straight month, the same level as 2019. That suggested employees have been expecting a tougher job market and are staying in their jobs. Read more of RSM’s insights on manufacturing and the middle market. Companies also laid off fewer workers on the month, 1.5 million compared with 1.7 million in August. If you square that with the quit rate, we might be seeing a labor market that is coming into a more of a balanced state. Looking ahead, the Fed will most likely face a host of weaker economic data, starting with October’s ISM manufacturing index that showed a bigger-than-expected drop in overall sentiment. The overall index, which was released on Wednesday, fell to 46.7% from 49%, indicating a contraction for the 10th time in 11 months. Employment and new orders both contracted in October for the sector according to the survey, pointing to an imminent slowdown. The drop in manufacturing employment was affected either directly or indirectly by the United Auto Workers strike, confirming our prediction that the impact of the strike will shave off thousands of jobs in October, bringing the net payroll change down to 160,000. The October data will be released on Friday.

The takeaway

We have been arguing that the final quarter and possibly the first quarter of next year will determine whether we will see a soft landing in the economy. Facing the tough task of deciphering between recession and inflation signals, the Fed should stay on its course of keeping rates the same so that no more shock will be added to an uncertain environment.