In September, the US job market showed strong performance overall. Nonfarm payrolls increased by a solid 336,000, and upward revisions to job growth in July and August further improved the employment figures. Job growth was driven by both public and private sector hiring, spanning across various industries. The labor force continued to expand, which helped to limit wage growth. Average hourly earnings only rose by 0.2% for the second consecutive month, resulting in a year-over-year growth rate of 4.2%, the slowest pace in over two years and slightly higher than pre-pandemic levels. The recent employment report led to an increase in Treasury yields and raised speculation that the Federal Open Market Committee (FOMC) may raise the federal funds rate at one of its two remaining meetings this year. While a rate hike before the end of the year is a possibility, our current assumption is that the last rate hike of the tightening cycle took place in July. The CPI report and the Q3 Employment Cost Index, which will be released on October 31st, will help the FOMC assess if progress is being made in controlling inflation despite the surprising strength in employment gains in recent months. U.S. job growth exceeded expectations in September, with a gain of 336,000 jobs compared to the consensus forecast of 170,000. Revisions to the previous two months’ data added an additional 119,000 jobs. Not only was the overall job growth impressively strong, but employment gains were seen across a wide range of industries. The employment diffusion index, a measure of hiring breadth across industries, reached 64.2, the highest reading since January. Leading the charge were the leisure & hospitality (+96,000) and government (+73,000) sectors, which are nearing their pre-COVID employment levels. Health care (+41,000), professional, scientific & technical services (+29,000), and manufacturing (+17,000) also saw notable gains. Despite recent reports of strikes, labor disputes had little impact on nonfarm payrolls in September. The UAW walkouts and Hollywood writers’ deal occurred too late in the month to be reflected in the data. However, a few smaller strikes did contribute to a slight boost of approximately 4,000 jobs. The increase in the labor force over the past year has played a role in supporting hiring. In September, an additional 90,000 individuals joined the labor force, following a significant increase in August. The labor force participation rate remained unchanged at 62.8%, maintaining an 11-month streak of avoiding a decline despite an aging population. Prime-age women have driven the increase in participation, although men ages 25-54 have also experienced a strong rebound. Furthermore, participation among older workers has slightly increased over the past year. We anticipate that labor force growth will remain solid in the near future, as the robust job market attracts more workers and declining finances push others to seek employment. The moderate rise in the labor force in September roughly matched the increase in employment according to the household survey (+86,000). Consequently, the unemployment rate remained unchanged at 3.8%. The larger pool of available workers, combined with a less intense hiring pace, has helped to alleviate wage pressures. Average hourly earnings in September were slightly lower than expected, rising by 0.2%. On a year-over-year basis, average hourly earnings have increased by 4.2%, the slowest pace in over two years. The 3.4% annualized growth in average hourly earnings over the past three months suggests a further decrease in the year-over-year figure is likely. While labor costs still need to decrease further to align with 2% inflation in the long run, the moderation is an encouraging step in the right direction for the Fed, which is focused on fighting inflation. Although individual workers may be experiencing slower wage growth, the steady rate of hiring implies that overall income derived from the labor market continues to increase, providing support for consumer spending. The strong employment report will likely keep the FOMC attentive to potential hindrances to inflation returning to a sustained 2% rate due to a tight labor market. While another rate hike before the end of the year is a possibility, our current expectation is that the last rate hike of the tightening cycle occurred in July. Core inflation remains subdued, and we anticipate another relatively modest reading in next week’s CPI report. Additionally, the robust growth in labor supply has helped restrain labor cost growth, as evidenced by the softness in average hourly earnings. The Employment Cost Index (ECI), which will be released on October 31st, will be crucial in confirming whether labor costs are indeed decelerating. If the CPI and ECI data align, we would expect the FOMC to maintain the current interest rates at its upcoming November 1 meeting.
