• US non-farm payroll employment rose 336k in September

• Revisions to the two prior months were positive, adding 119k from the previously reported figures

• Unemployment rate unchanged at 3.8%

• Wages still high as average hourly earnings increased by 0.3% MoM, 4.2% YoY

• Labor force participation unchanged at 62.8%

• September payroll gains tilting odds heavily in favor of another rate hike

The September employment was strong across-the-board, a sign that the US economy is hanging tough despite higher interest rates. Nonfarm payrolls grew at a robust 336,000 pace in the month, and upward revisions to job growth in July and August further flattered the employment figures. The change in total nonfarm payroll employment for July was revised up by 79,000, to 236,000, and the change for August was revised up by 40,000, to 227,000. With these revisions, employment in July and August combined is 119,000 higher than previously reported.

Job growth was driven by both public and private hiring and a diverse set of industries. Government employment shot up by 73,000, padding the headline increase. It was the third straight big increase in hiring. Private payrolls rose 263k – the strongest pace of monthly gains since January. Service-sector gains (+234k) were concentrated in leisure & hospitality (+96k), health care & social assistance (+66k), retail trade (+20k) and professional & business services (+21k). Goods producing industries added 29k jobs last month, with gains spread across construction (+17k), manufacturing (+13k), and mining & logging (+1k). The breadth of hiring across industries – as captured by the diffusion index widen to 64.2% – which is the highest level since January 2023.

In the household survey gains in civilian employment (+86k) nearly matched those of the labor force (+90k), which resulted in the unemployment rate holding steady at 3.8%. The participation rate also held steady at its cyclical high of 62.8%. Average hourly earnings were up 0.2% MoM while the twelve-month change inched a tick lower to 4.2% YoY.

A marked increase in labor supply over the past year has helped to support overall hiring. An additional 90k workers entered the labor force in September on the heels of what was already a major swell in August. September’s moderate rise in the labor force roughly matched the increase in the household survey’s measure of employment (86k). As a result, the unemployment rate was unchanged at 3.8% in September, and the number of unemployed persons was essentially unchanged at 6.4mn. The labor force participation rate was unchanged at 62.8%, continuing its now 11-month streak of avoiding a decline despite the headwinds caused by an aging population. Prime-age women have led the charge, although men ages 25-54 have also seen participation rebound strongly. The rate for those in the 25-to-54 age group also was unchanged at 83.5%. Participation among older workers also has edged higher over the past year. A more encompassing measure of unemployment that includes discouraged workers and those holding part-time positions for economic reasons edged down to 7%. We see scope for labor force growth to remain solid in the nearterm as the still-strong jobs market pulls in workers and deteriorating finances give other workers a push.

The more abundant supply of workers along with a less frenzied pace of hiring is helping to dampen wage pressures. Wage increases were softer with average hourly earnings up 0.2% MoM to mark the smallest gain in 18 months. The increase in wages over the past year also slowed again to 4.2% from 4.3%. Fed officials want wage growth slow to pre-pandemic levels of 2% to 3% to help in the fight against inflation.

September payroll gains tilting odds heavily in favor of another rate hike

Job growth was considerably stronger than expected in September, rising by 336K which was the fastest pace since January. Sizeable revisions to the prior months also contributed to an abrupt U-turn in what had previously looked like a steady downward trend in the pace of hiring. While wage growth came in under expectations, Fed officials would not be able to look past the fact that labor force growth is slowing at a time when job openings remain elevated, which if left unchecked, will likely pressure wages higher over the coming months.

Even with the recent tightening in financial conditions and inflation trending favorably in recent months, September’s job report showed clear evidence that the labor market remains far too hot. The strong addition to payrolls squares with the Job Opening and Labor Turnover Survey (JOLTS) that showed job openings jumped (9.6mn) in August, reversing the two prior months’ declines, as firms continue to search for talent. At this point, another rate hike in November seems inevitable. And while next week’s CPI report will provide another key piece of the puzzle, policymakers are likely to put more weight on the latest employment numbers as the continued labor market resilience remains an upside threat to inflation. The surprise increase in hiring, unless it’s a one-off, could complicate the Federal Reserve’s decision on when to stop raising interest rates. The central bank is weighing whether to approve one more hike this year and the September employment report could nudge them in that direction.

Payrolls is the number the market puts most emphasis on and we have to acknowledge that such strength keeps alive the prospect of another rate rise and fits with the Fed’s higher for longer narrative surrounding the policy rate. September’s resoundingly strong employment report will likely keep the FOMC on guard as it watches for signs that a tight labor market could prevent inflation from returning to 2% on a sustained basis. Another rate hike before the end of the year is a possibility, but for now our base case remains that the last rate hike of the tightening cycle occurred in July. According to CME Group's FedWatch, financial markets were leaning toward the Fed keeping rates unchanged at its Oct. 31-Nov. 1 policy meeting, though the odds of a hike are rising. Inflation data next week could offer more clarity. Core inflation continues to grind lower, and we expect another relatively tame reading in next week’s CPI report. The current consensus is for both headline and core CPI to rise 0.3% MoM, which is still too high for the Fed, which wants to see 0.1% or 0.2% MoM prints. In addition, robust labor supply growth has helped restrain labor cost growth, as indicated by the softness in average hourly earnings. Next week’s CPI report and the 3Q Employment Cost Index to be released on October 31 will help the FOMC determine if progress is continuing in its inflation fight despite the surprising strength in employment gains in recent months. If the CPI and ECI data cooperate, we would expect the FOMC to remain on hold at its upcoming November 1 meeting.

Source: BIMB Securities Research - 9 Oct 2023