• US non-farm payroll employment rose 150k in October

• Revisions to the two prior months were negative, subtracting 101k from the previously reported figures

• Unemployment rate rose from 3.8% to 3.9%

• Average hourly earnings increased by 0.2% MoM, 4.1% YoY

• Labor force participation dropped from 62.8% to 62.7%

• The Fed’s door is still open although the labor market and inflation both look to be charting a course for calmer waters

The US economy saw job creation decelerate in October. The US added a modest 150,000 new jobs in October in a sign of a cooling demand for labor, confirming persistent expectations for a slowdown and possibly taking some heat off the Federal Reserve in its fight against inflation. The change in total nonfarm payroll employment for August was revised down by 62,000 to 165,000, and the change for September was revised down by 39,000 to 297,000. With these revisions, employment in August and September combined is 101,000 lower than previously reported.

Private payrolls rose just 99k, with gains entirely concentrated in the service sector (+110k) while goods-producing industries shed 11k jobs. However, the pullback in the latter was entirely concentrated in manufacturing (-35k), which was largely attributed to the UAW strike against General Motors, Ford and Stellantis – which estimated to have temporarily removed 33k workers from payrolls. Across the service sector, gains were largely concentrated in healthcare (+77k), but professional & business services (+15k) and leisure & hospitality (+19k) also chipped in. The construction industry added 23k jobs. Employment in government increased by 51k, returning to its pre-pandemic level. The rise in government payrolls was driven by local government hiring.

The unemployment rate rose a tick to 3.9%, the highest level since the beginning of 2022.The share of people working or looking for work fell slightly to 62.7% and came off a post-pandemic high. Average hourly earnings were up 0.2% MoM while the twelve-month change inched a tick lower to 4.2% YoY.

Although payroll growth is easing, the labor market remains relatively tight. The unemployment rate inched up to 3.9% in October, slightly higher than the cycle low of 3.4% first hit in January 2023, but still low compared to historical averages. The slight upturn in the jobless rate this year reflects labor supply and demand becoming more balanced. Employment as measured in the household survey, which is used to compute the unemployment rate, showed a decline of 348,000 workers, while the rolls of the unemployed rose by 146,000 to 6.5mn. While the number of employed people rose by 150,000 to nearly 157mn. The net effect of that meant the labor force grew by 296,000 people to 167.7mn. The labor force participation rate - the share of adults either working or actively looking for work - slipped a tick to 62.7% in October but is still 0.5 percentage points higher than a year ago, while the labor force contracted by 201,000. The employment-population ratio was at 60.2%. A more encompassing jobless rate that includes discouraged workers and those holding part-time positions for economic reasons rose to 7.2%, an increase of 0.2 percentage point.

Wage growth moderated, showing some inflationary pressure is easing. Average hourly earnings added seven cents in October from the prior month, or 0.2%, marking a slower pace than September's 0.3% gain. Annual wages rose 4.1% last month, the slowest pace since the 3.9% gain in June 2021.

The Fed’s door is still open although the labor market and inflation both look to be charting a course for calmer waters

The October jobs report showed a lower monthly total, a higher unemployment rate, a slower pace of job gains and cooler wage growth. Job growth slowed considerably with the US economy adding the fewest jobs in four months and recording the second weakest monthly gain since December 2020. That said, some of the ‘softness’ can be chalked up to labor strikes spanning the auto, entertainment, and healthcare industries, as striking workers are not counted on payrolls. However, with tentative labor agreements between the UAW and the Big 3 automakers now reached, a significant number of these workers will be recounted in next month’s payrolls. The improvement in labor supply amid a cooler pace of hiring has yielded a more moderate pace of wage growth. Average hourly earnings rose 0.2% in October, the slowest monthly pace in more than a year.

A host of other indicators released last week provided additional evidence that the labor market is moving back to pre-pandemic form. During September, the count of job openings as measured by the Job Openings and Labor Turnover Survey (JOLTS) edged up to 9.55mn. While the number of job vacancies remains highly elevated, both the hiring and quits rate - which were both unchanged during the month at 3.7% and 2.3%, respectively - more or less have returned to 2019 averages. What's more, the Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.1% in 3Q23, a touch higher than the 1.0% in 2Q23. Labor costs increased 4.3% YoY in 3Q23, the smallest gain since the 4Q21, after advancing by 4.5% in 2Q23. Growth in annual compensation is gradually slowing after peaking at 5.1% last year, in line with some easing in labor market conditions. It, however, remains well above the pre-pandemic pace. Wages increased 1.2% in 3Q after climbing 1.0% in the prior three months. They were up 4.6% YoY after advancing by the same margin in 2Q. Strong wage growth is being driven by worker shortages that still persist in some services industries. On top of that, the 3Q23 nonfarm productivity report showed that unit labor costs declined at a 0.8% annualized pace in 3Q, solidifying a downward trend since 2022. The decline in labor unit costs has occurred against a backdrop of improving productivity. Overall nonfarm labor productivity grew at a robust 4.7% YoY in 3Q23, bringing the fourquarter moving average of growth in employee output per hour back to pre-COVID norms.

October's employment report, in conjunction with the third-quarter report on productivity and costs, clearly indicates that the economy has converged already to potentially a more sustainable path of low inflation and solid potential growth. That was exactly what the central bank is looking for. However, one month is not a trend, and the October data is not enough to convince Federal Reserve Chair that the labor market has cooled down. The central bank will need to see a little more proof before pulling back on its rate-hiking campaign. The next FOMC meeting will be on 12/13 Dec 2023 and the decision will be accompanied by Powell’s press conference and more importantly, an updated Summary of Economic Projections (SEP) and the highly anticipated Dotplot chart. Key data ahead of the decision include US jobs data for Nov (8 Dec), and Oct CPI (14 Nov) and Nov CPI (12 Dec).

The Federal Reserve held interest rates steady at 5.25%-5.50% and this is the first time in the current tightening cycle that the Fed has paused for two consecutive meetings. In the press briefing following FOMC meeting, Fed Chair Powell acknowledged that the recent tightening in financial conditions, if sustained, could act as a substitute for future rate hikes. While Powell tries to curb the markets’ ‘enthusiasm’, there looks to be a good case to argue that the higher Treasury yields, tighter financial and credit conditions are helping to do some of Fed’s work and reduces the need for the Fed to tighten monetary policy further, as long as the still elevated headline and core PCE continues to ease. However, Powell also underscored that policymakers have a low conviction on whether November’s policy stance is ‘sufficiently restrictive’ – hence the need to proceed carefully and take a meeting-bymeeting approach.

However, the central bank still left the door wide open to potentially raising rates in the future if needed to keep the disinflation momentum going. October’s cooling in the labor market combined with expectations that economic activity will pullback in 4Q23, suggests that they may not need to walk through it before the year is done, but only time - and the data - will tell. We suspect the Fed will need to see a few more softer employment reports met by a further easing in inflationary pressures before they have enough evidence to call it quits.

Source: BIMB Securities Research - 6 Nov 2023