This year, the FOMC has repeatedly made the mistake of chasing monthly data one way or another. First, high inflation turned them super hawkish in the spring, then the rise in the unemployment rate over the summer months drove them into a 50-bp cut in September and an upward revision to the end-2024 unemployment rate forecast from 4.0% in June to 4.4% in the September Summary of Economic Projections (SEP). Even though we have been arguing for a summer start to cuts, September’s decision felt rushed and somewhat panicky and seemed to go against the recent data flow. Latest labor market updates reinforce the idea that there is no need for aggressive frontloading of rate cuts. One 50-bp cut as an insurance move is understandable. Another one is not warranted by the data flow. Admittedly, there is no getting away from elections and geopolitical risks, but we continue to expect 25 bp cuts at each of the remaining two meetings this year. The market was previously leaning more dovish but Friday’s payrolls data brought it in line with our views.
Payrolls reportedly jumped by 254k in September, the most since March. However, we do not take this fully at face value because the response rate was unusually low, meaning that a downward revision is likely. More broadly, we do not believe this portends a new sustained pick-up in hiring.
Not only did the headline beat expectations, but for the first time in six months, we got an upward revision to the prior two months estimates (+72k). This should not be a surprise because the string of five consecutive negative revisions that preceded it were extremely unusual. However, there were some oddities with the revisions, specifically the fact that they were heavily driven by the government sector (+51k). This seems odd because if there were one sector where response rates and accuracy of survey responses should be high, it is the government sector.
Coming back to September data, the increase in hiring was driven mostly by the private sector. Of the 254k total jobs added, the private sector accounted for 223k, and the service sector for 202k of those. This was nearly double the 109k service jobs added in August. Gains were broad-based across sub-industries, but we are not convinced that they will all stand up to the test of time. Hospitality had its best month since January 2023, for instance, while retail and business services both bucked the recent trend of declines. This seems counterintuitive given the Conference Board labor differential suggests jobs are getting harder to find.
Still, the payrolls and the job openings data say labor demand is hanging in there, also confirmed by persistently low unemployment claims. Indeed, the household survey showed another one-tenth decline in the unemployment rate in September to 4.1% in the context of unchanged labor participation. The labor underutilization rate ticked down two tenths to 7.7%.
That said, hours were weak, which further undermines the credibility of the strong headline payrolls. Despite the rise in employment, aggregate hours worked actually declined 0.1% m/m in September; by contrast, in March when payrolls were similarly strong, aggregate hours rose 0.4%. Something doesn’t fully add up here.
Wages were slightly stronger than expected for the second month running, something worth keeping an eye out but not getting overly concerned at the moment. Average hourly wage (AHE) inflation for all employees rose to 4.0% y/y—the highest since May and up from July’s 3.6% y/y low. However, AHE inflation for production and non-supervisory employees ticked down a tenth to 3.9% to match the recent July low. Moreover, strong productivity gains had brough unit labor cost growth all the way down to 0.4% y/y in Q2, which is unsustainably low, so a modest increase from here would make sense.
The other big news since the September rate cut was that there were considerable upward revisions to gross domestic income that lifted the savings rate estimate markedly, from 2.9% to 4.8%. This, too, should be reassuring to the Fed in terms of not needing to rush the rate cuts. To the extent that income is higher and the savings cushion thicker, consumers can continue to spend and employers have little inventive or need to cut workers. Hence, the virtuous cycle of growth can continue.