The U.S. economy generated 254,000 jobs in September, exceeding forecasts, and the unemployment rate declined to 4.1% as growth continues to barrel along at or above a 3% pace.
The jobs data released Friday strongly suggests that the Fed will cut by 25 basis points on Nov. 7 at its next meeting.
When taken out to three digits, the jobless rate was 4.051%, which means it narrowly missed the Federal Reserve’s 4% definition of full employment.
Upward revisions to past estimates show that total employment increased by 326,000. What is more encouraging, though, is that average hourly earnings increased by 0.4% on the month and were up by 4% on the year heading into the critical holiday shopping season. On a three-month average annualized pace, earnings rose by 4%.
Gains were clustered in the private service-providing sector, which gained 202,000 jobs, and in the education and health sectors, which added 78,000 jobs. Of those, 45,000 positions were in the higher-paying health care sector.
Trade and transport added 13,000 jobs, retail trade 16,000, information 4,000, finance 5,000, professional business services 17,000 and government 31,000.
The higher-paying goods-production sector added 25,000 positions. The household survey increased by 430,000 jobs, but to be statistically significant, that survey needs to increase or decrease by 600,000.
The top-line increase in the establishment survey, though, probably overstates the true underlying pace of hiring because of seasonal and technical factors that traditionally bedevil the initial estimate of the September jobs report.
The true underlying pace of hiring most likely stands between the185,666 three-month pace and the six-month average of 166,500.
So yes, hiring is slowing compared to the hot and unsustainable post-pandemic recovery, but it does not reflect an economy at risk of falling into recession or a labor market overly cooling.
Policy implications
The September jobs report reaffirms the direction that Federal Reserve Chair Jerome Powell implied at his speech on Monday before the National Association for Business Economics in Nashville.
His remarks were widely understood as dampening market expectations of another 50 basis-point reduction in the federal funds policy rate.
The jobs data released Friday strongly suggests that the Fed will cut by 25 basis points on Nov. 7 at its next meeting.
Read more of RSM’s insights on the economy and the middle market.
We think that the Fed is well positioned to reduce its policy rate by another 50 basis points before the end of the year pending future employment and inflation data.
With the economy growing at a robust pace, we note that the Fed is simply reducing a too restrictive rate and stands ready to recalibrate that descent toward its neutral level as the actual growth, employment and inflation data come in.
While we would welcome a quick return to neutral, which the Fed defines as 2.9%, with a string of 25 basis-point rate cuts, it is likely that the Fed will want to cut by 25 basis points in each quarter next year and into 2026.
Since the middle of 2022, the economy has averaged 2.94% growth. One risk to the policy outlook is that the economy will continue to outperform and that the Fed will slow its roll toward its current policy destination of near 3%.
Rising labor supply
During recessions, there is a drop in demand for labor, shown in the chart below as the blue demand line higher than the orange supply line.
One exception was the financial crisis, in which many firms moved production offshore, causing a plunge in the demand for labor. But that is not the case now.
During expansions, demand for labor increases faster than the supply of labor can respond. This gap can be attributed to the sidelined supply of available labor not having the skills to keep up with newly developed technology.
The result is a shrinking supply of labor with sufficient skills, as noted by manufacturers polled by the regional central banks.
In our estimation, approximately 19% of the increase in unemployment over the past year can be explained by the increasing supply of workers.
It is equally clear that a combination of population growth, workers returning to the labor force and immigration have driven the increase.
We interpret this not as a sign of impending recession. Rather, we see it as an indication of a midcycle expansion despite well-founded concerns about the future deterioration of the labor market.
It is internally consistent that as the economy continues to grow at or above 3% amid the strongest productivity gains since 1995 to 2004, firms will slow hiring compared to the pandemic recovery.
Recent declarations of an imminent end to the expansion and a real-time deterioration of the labor market are linked to a misreading of the business cycle.
Yet the expansion continues as recent upward revisions to gross domestic product, gross domestic income and the national savings rate all point to a 3% or better growth rate in the third quarter and a strong finish to the year.
The downturns in the supply and demand factors in 2022 and 2023 now look more like a midcycle correction than the end of a business cycle.
The modest increase in the unemployment rate before the September report is likely because of a combination of supply and demand factors.
To start, increases in real earnings have prompted workers to return to the labor force, and that re-entry that will take time to absorb because of their lack of skills.
Second, employers are still reluctant to expand because the weighted average cost of capital has not yet declined to the point where firms are ready to ramp up their investments.
A look ahead
Should the current Boeing strike that includes 33,000 workers continue through Oct. 13, that will distort the next employment report, for October.
Those workers as well as displaced workers in the national aerospace ecosystem, as well as local workers affected by the labor action, will show up as lost jobs and temporarily distort the estimate of total employment.
To a certain extent, there is a strong probability that the September jobs report is the last “clean report” before the presidential election and the Federal Open Market Committee’s policy decision next month.
The Federal Reserve will take this factor into consideration and look right though such noise around the top-line estimate of total employment and the unemployment rate.
The takeaway
Hiring remains rock solid and the American economy stands at full employment.
With the economy at full employment, growth increasing at or above a brisk 3% and productivity increasing at 2.7%, it is natural that firms will carefully manage their labor force.
Firms should continue to hire at a more modest pace than they did when the economy bounced back from the pandemic.
Perhaps it’s time to stop using an analytical framework of soft landing versus hard landing. Instead it’s time to simply start speaking about a robust expansion at midcycle with interest rates falling and a productivity boom enhancing capital expenditures as the weighted average cost of capital falls.
Whatever problems the American economy has, we will take them. We would not want to be in any other economy’s position right now.
