The American labor force has entered a new equilibrium for job creation.
Over the past three months, the economy has generated an average of 51,000 jobs a month, so the initial September estimate of 29,000 new jobs created, which was released on Friday, is in line with the 35,000 positions needed to keep the labor market stable.
When combined with the increase in the unemployment rate to 4.2%, the slowing in the top-line estimate should reinforce market expectations that the Federal Reserve will not increase interest rates at its meeting at the end of the month.
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Growth in the domestic supply of labor will remain soft given the well-known long-term demographic challenges posed by the retirement of baby boomers and restrictive immigration policies.
Soft readings like September’s and an underlying trend of around 50,000 new jobs added monthly will be the norm over the next two years at the least.
The unemployment rate taken out to four digits increased from 4.141% to 4.175%, which is reported by the Bureau of Labor Statistics as 4.2%.
The increase in the unemployment rate was because of an additional 485,000 people looking for work, which resulted in an increase in the labor force participation rate from 61.6% to 61.8%.
In addition, that increase in the participation rate and the advance of 406,000 in the household survey, which includes workers outside the corporate payrolls, are both statistically insignificant moves that policymakers or economists worth their salt will label as noise.
Ever since the Bureau of Labor Statistics updated the way it estimates the monthly job numbers in the January data, we have made the case that one should not make too much of any one estimate.
Instead, a better gauge can be found in the three- and six-month averages to get a sense of the underlying pace in hiring.
That is why in many respects a soft and boring report is exactly what policymakers at the Federal Reserve want and need as they ascertain the impact of higher energy prices and sticky service sector inflation that was evident in the recent personal consumption expenditures index report.
One thing that policymakers do not need to worry about when it comes to inflation is second-order wage pressures. Rising nominal average hourly earnings slowed to a 0.1% monthly increase and were up by 3% from one year ago.
The three-month average annualized pace of hourly earnings stands at 2.6%. In fact, given the direction of inflation, it is likely that wages once adjusted for inflation will be flat to negative for the seventh consecutive month when the Consumer Price Index is released on Oct. 14.
The data
Higher-paying jobs in goods production and manufacturing increased by 18,000 and 9,000, respectively, in September. Construction employment increased by 11,000 while trade and transport jobs increased by 18,000.
Retail trade increased by 6,000, while private education and health advanced by 20,000. Leisure and hospitality employment increased by 10,000.
Job losses occurred in the information sector, which fell by10,000, professional business services by 9,000, temporary help by 11,000 and government by 17,000.
Total private hours and manufacturing hours worked remained unchanged in September.
Aggregate hours worked increased by 1.1%, which should support a modest pace of consumption to close out the third quarter. The median duration of unemployment stands at 11.5 weeks, which is in line with recent estimates.
The takeaway
The low-hire, low-fire U.S. jobs market remains our baseline forecast, and one should anticipate the soft pace of hiring to continue.
Statistically insignificant noise is the primary reason for the modest uptick in unemployment, The best description of the American labor market these days is one of full employment.
The soft pace of hiring and noise around the size of the domestic labor force should support those at the Federal Reserve who are looking to keep the federal funds rate on hold at it next meeting on Oct. 27-28.
The September data implies little to no risk of second-round wage-induced inflation; the Fed is simply not worried about the employment side of its dual mandate at the current time.
Our baseline call on monetary policy remains no hike in October, one 25 basis-point hike in December and then another in March.
