Hiring in an age of uncertainty

There were a few data signals going into Friday’s blockbuster jobs report that many market watchers and economists missed.

Layoffs, as measured by a rolling four-week average of initial jobless claims, hit their lowest level in more than a year and a half. August showed an uptick in job openings, a hint that companies were about to ramp up hiring. And September’s ADP National Employment Report suggested that a rebound in private-sector hiring was under way.

Even people who read these data signals, however, might have been unprepared for the big jump in hiring we saw in Friday’s non-farm payrolls report from the Bureau of Labor Statistics. Job creation was up 60 percent, to 254,000 new jobs in September from 159,000 in August.

Even after applying  upward revisions to August and July, average job gains for the three months preceding September were only 140,000. 

What happened? Why were employers slow to hire this summer but so willing to hire in September?

The answer is uncertainty.

Uncertainty versus risk

Economists make a sharp distinction between risk and uncertainty. For employers, both can describe an unknown.

Companies can gauge risk by assigning a probability that the situation in question occurs. Then they can prepare for that outcome.

Uncertainty, by contrast, can’t be measured, and companies therefore can’t prepare for it. Uncertainty can lead employers to delay hiring and investment decisions.

Uncertainty is heightened

In May 2023, the World Health Organization declared an end to the public health emergency caused by the global pandemic, effectively ending one of the most uncertain episodes in economic history. More than a year later, however, we’re still living with higher-than-normal uncertainty.  

The United States is nearing the end of a four-year presidential election cycle, which tends to create economic inertia as some companies and consumers put off making big financial decisions while they wait to see if big policy changes are in the making.

Monetary policy and inflation create their own uncertainty. In September, the Federal Reserve cut interest rates from their highest level in two decades. Before that decision, economic commentators were in wild disagreement about the health of the economy as they debated the likelihood of a soft or hard economic landing and argued over the Fed’s ability to navigate too-high inflation while avoiding an economic slowdown.

Global tensions in the Middle East are another source of uncertainty, with the added potential side effect of oil price volatility on another bout of inflation.

Last week’s short-lived port strike could have restarted another inflation surge had it continued. The labor action reminded us how supply chain logjams can arise suddenly.

Finally, Hurricane Helene is proving to be one of the most destructive U.S. storms on record, as measured both the number of lives lost and the cost to the economy.

Taken together, these events show how vulnerable the economy is to an increased level of uncertainty, be it geopolitical, social, monetary, political, or weather-related.

The effect on hiring

This summer, we saw the impact of uncertainty on hiring, particularly for companies with more than 500 workers. ADP payroll data showed that monthly hiring by large employers averaged a moderate 53,000 from June to August. In September, hiring by these large companies jumped to 86,000.

Part of that increase may be attributable to the long-awaited start of Fed rate cuts. There also was clearer evidence than we’ve seen in months, maybe years, that the Fed had engineered a soft landing that will put us on a path to low inflation with little or no economic pain.

My take

Seventy-five percent of the jobs created last month were in sectors that are less sensitive to interest rate policy, including government, leisure and hospitality, and education and healthcare.

Cyclical sectors, where rates make a big difference, either continued to shed jobs (manufacturing) or held steady (construction).

That means last month’s hiring surge wasn’t directly attributable to lower interest rates or changing economic conditions. Instead, it was triggered by a reduction in the uncertainty that has been clouding employer decisions. Hesitancy to hire over the summer wasn’t driven by economic weaknesses or lack of demand for workers.

There’s a lesson here for the Federal Reserve: Clarity is the antidote to uncertainty. It’s okay to be data-dependent, but if investors, companies, and consumers are kept guessing on monetary policy, that uncertainty could lead to unwarranted economic stasis that looks like economic weakness even if it isn’t.

The week ahead

Wednesday: The Federal Open Market Committee will release minutes of its rate-cutting meeting, putting its decision to lower rates by an assertive 50 basis points in a new light after the big surge in jobs and 4.7 percent year-over-year growth in wages. 

Thursday: Consumer Price Inflation is the big number of the week. Any sign of a reacceleration in service inflation would be seen as a challenge to the Fed’s aggressive rate cut last month. On the other hand, a drop in core CPI, which excludes volatile energy and food prices, could be one of the final data points the Fed needs to commit to a long-term strategy on rate cuts.