The U.S. economy is proving far more resilient in the face of sustained pricing pressures than otherwise thought a short time ago.
The economy added 263,000 jobs in September, slower than the 315,000 jobs in August but still a sign of a resilient labor market, according to Labor Department data released Friday.
With third-quarter growth trending in the vicinity of 3% and hiring remaining stout, the case for the Federal Reserve to moderate its rate increases remains weak.
Inflation is swiftly moving through the real economy, causing rents to move higher at a time when real wages remain flat at best. These dynamics require the Fed to lift its policy rate above the 4.7% reflected in the core personal consumption expenditures price index.
The job gains in September, a 3.5% unemployment rate on the month and an average hourly earnings increase of 5% on a year-ago basis are simply not sufficient for the central bank to pull back on its efforts to restore price stability.
Despite a slowing in the pace of hiring and a significant decline in job openings, we still expect the Federal Reserve to increase the federal funds policy rate by 75 basis points at its November meeting, to a range between 3.75% and 4%.
Federal Reserve policymakers will almost certainly need to observe a series of monthly job reports with a top-line change in total employment of around 100,000 per month to even consider a pivot.
In our estimation, it is probably best to wait until job gains are at or below the 65,000 break-even point that we think meets the minimum necessary level to account for labor growth in the economy.
We expect that the Fed will continue to lift the policy rate until it reaches 4.75% to 5% by the end of the first quarter of next year.
That implies that the central bank will ease the pace of its rate increases in December to 50 basis points and then to 25 basis points at its February and March meetings. Those increases would set up a potential pause in the second quarter.
The data
The tenor of the September jobs report is that labor demand remains rock solid with total private employment increasing by 288,000 jobs. Higher-paying, goods-producing jobs increased by 44,000, construction added 19,000 and manufacturing employment advanced by 22,000.
Private service sector jobs increased by 244,000, led by the 90,000-job increase in health and education, 83,000 in leisure and hospitality, and 46,000 in business services. Information jobs increased by 13,000, and temp help rose by 27,000.
Of the major employment categories that lost jobs, retail trade shed 1,000, the financial sector fell by 8,000 and overall government jobs declined by 25,000.
Average hourly earnings increased by 0.3% on the month, 5% on a year-ago basis, and 4.8% on a three-month average hourly basis. The labor force participation rate declined to 62.3% while the median duration of unemployment eased to 8.3 weeks.
The takeaway
While hiring remains solid, it is beginning to moderate, and we expect that the unemployment rate will increase to 4.6% by the end of next year, which will entail the loss of roughly 1.7 million jobs over that time span.
But the pace of hiring has not slowed enough to alter the Federal Reserve’s efforts to restore price stability. That means job losses, higher unemployment and a likely recession by the end of the second quarter of next year.
