Labor market tide starting to turn
Weak jobs report pushes Fed to sidelines.
Bottom Line
The labor market was weaker than expected across the board in October, adding credence to the Federal Reserve’s prescient decision on Wednesday to skip an interest rate hike for the third time in its last four policy-setting meetings. In conjunction with softening economic data such as this week’s disappointing ISM readings on both manufacturing and services the Fed may very well be done hiking rates this cycle. The terminal value of the fed funds target rate is now at an upper band of 5.5%, a 22-year high. However, we expect the Fed to keep interest rates higher for longer to continue driving inflation down to its 2% target, and we do not expect the Fed’s first cut before the second half of 2024.
Nonfarm payrolls rose by a much weaker-than-expected 150,000 jobs in October (consensus at 180,000, Federated Hermes at 160,000), marking the weakest monthly gain since June. Importantly, previously reported August and September gains combined were revised down by 101,000 jobs, which means that adjusted payroll growth of only 49,000 jobs last month was the weakest since December 2020.
Broader jobs picture looks just as bad Private payrolls were even worse, rising by a weaker-than-expected 99,000 jobs in October (consensus at 145,000), with August and September revised down by a combined 80,000 jobs. So, the adjusted gain of only 19,000 jobs versus 246,000 in September was the weakest in nearly three years. Household employment lost 348,000 workers in October, the first decline in five months, down sharply from a much-stronger average gain of 212,000 jobs over the previous four months. The ADP private payroll survey in October was the second weakest this year, and Challenger layoffs rose by 9% from a year ago.
The official rates of unemployment (U-3) and labor impairment (U-6) rose to 3.9% and 7.2%, respectively, and the participation rate fell to 62.7%. Average hourly earnings rose by a stronger-than-expected 4.1%, while hours worked suffered a disappointing decline to 34.3.
The manufacturing sector lost a much greater-than-expected 35,000 jobs in October (consensus at a smaller loss of only 10,000 jobs). But that may be related to the six-week UAW strike, which reached a tentative settlement in recent days. So, noisy auto-related manufacturing weakness may reverse in coming months.
Important labor-market indicators are mixed:
- ADP private payroll survey October added a weaker-than-expected 113,000 jobs (consensus at 150,000). While that’s better than the 89,000 jobs added in September (which was the worst private jobs report since January 2021), last month was the second weakest this year. Also, job stayers experienced their slowest wage growth in two years, up by 5.7% y/y in October and by 8.4% y/y for those who changed jobs.
- Initial weekly jobless claims This high-frequency leading employment indicator declined to a 9-month low of 200,000 claims for the October survey week that ended October 14. But continuing claims have risen by nearly 10% over the past six weeks, although the four-week moving average is just off a 9-month low, dropping by 18% over the past four months.
- Challenger job cuts Nearly 37,000 layoffs in October, which was a 9% increase from a year ago, although the pace of layoffs did decline sequentially by 22% from September. Technology companies cut 6,500 jobs last month, accounting for 18% of total layoffs in October.
- Lagging Job Openings & Labor Turnover Survey (JOLTS) Essentially unchanged in September at a higher-than-expected 9.55 million job openings (consensus at 9.4 million), compared with a downwardly revised 9.5 million in August. However, this is down 20% from a record 12 million job openings in March 2022. There are still 1.5 job openings for every unemployed worker (the lowest since September 2021), down from a peak of 2.0 in March 2022. With 3.66 million voluntary quitters in September, the quits rate held steady at a cycle low of 2.3%, the lowest level since 2020, which suggests that workers are less confident today in their ability to find another job. This metric peaked at 3.0% in April 2022.
Hours worked decline while wage inflation is persistent Average hourly earnings slipped a tick to a 0.2% m/m gain in October (a tick below consensus), which translated into a higher-than-expected 4.1% y/y increase, versus a 4.3% gain in each of the three previous months. Average weekly hours worked declined to 34.3 in October (matching cycle lows), down from 34.4 in August and September and 34.5 in February. Each decline of 0.1 hour worked is the equivalent of subtracting an estimated 350,000 jobs from the economy. This is important, as employers tend to cut hours before they cut staff.
Unemployment & labor impairment rates rise, participation rate declines Household employment (an important leading employment indicator) lost 348,000 jobs in October, down sharply from solid gains averaging 212,000 jobs in each of the past four months, marking its single worst month since April 2020 at the depth of the Covid recession. The number of unemployed people rose by 146,000 in October, compared with a modest increase of only 5,000 workers in September. As a result, the official rate of unemployment (U-3) ticked up to a new 22-month high of 3.9% in October from 3.8% in September and August, which rose from April’s 53-year low of 3.4%. This change triggers the so-called “Sahm Rule,” which states that all recessions experience a 0.5% increase in the unemployment rate within a 12-month window.
The Fed’s own forecast from its September Summary of Economic Projections (SEP) is that the unemployment rate will peak at 3.8% in 2023 and will rise to 4.1% by year-end 2024. The labor impairment rate (U-6) rose to 7.2% in October from 7.0% in September, matching a 21-month high, up from the cycle low (dating back to 1994) of 6.5% in December 2022.
The civilian labor force declined by 201,000 in October, compared with a gain of 90,000 workers in September. As a result, the participation rate declined to 62.7% in October from a post-pandemic high of 62.8% in both August and September. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery widens The unemployment rate for highly-educated workers was unchanged at 2.1% in October, down from 2.2% in August, but that’s still above September 2022’s cycle low of 1.8%. However, the rate for low-educated workers surged to 5.8% in October, up from 5.5% in September, 5.4% in August and 5.2% in July, compared with its 31-year low of 4.4% in November 2022.
Sector details mixed:
- Temporary help (an important leading employment indicator) added 7,000 jobs for the first time in nine months, after losing 9,000 jobs in September, 10,000 in August, 17,000 in July and 36,000 in June.
- Government hiring rose by 51,000 jobs in October (paced by 3,000 federal hires) for the third consecutive month. Last month, state hiring added 10,000 jobs and local hiring totaled 38,000 workers.
- Manufacturing was much weaker than expected, subtracting 35,000 jobs in October (consensus at a loss of 10,000), versus a gain of 14,000 jobs in September and losses of 2,000 in each of August and July. October results may be noisy due to the six-week UAW strike. The ISM manufacturing index has been in contraction territory under 50 in each of the past 12 months at 46.7 in October.
- Construction remains solid, adding 23,000 jobs in October, compared with 13,000 in September and 30,000 in August. Although mortgage rates more than doubled from 3% to a 22-year high of 8% over the past two years, there is still enormous pent-up demand for shelter.
- Retail added only 1,000 jobs in October, versus 13,000 jobs in September and a loss of 6,000 in August. The important spring “Mapril” season was soft, with retail sales rising by a tepid 1.7% y/y versus 8.6% last year, and Back-to-School sales rose by only 2.7% y/y versus 9.8% in 2022. So, Christmas spending could be uninspiring, as well, which is consistent with weak October hiring trends.
- Leisure & hospitality added only 19,000 jobs in October, compared with 74,000 new workers in September and only 8,000 added in August. Weak hiring trends in this category are consistent with the sharp rise in unemployment among low-skilled workers.