MainStreet Macro: Jobs week delivered good news, but a riddle endures

Jobs week is one of my favorite times of the month, and these days the importance of employment data is even more pronounced. With inflation bearing down, U.S. job and wage reports provide the clearest signals available on whether hiring and pay are on pace to drive up the cost of goods and services even more.  

So without further ado, let’s take a walk through the jobs week that was.

Monday: Manufacturing points to slower hiring

Because it relies on capital investment – money spent on physical assets such as buildings and equipment – manufacturing is one of the most rate-sensitive segments of the economy. As interest rates rise, manufacturing can be a barometer that tracks the pace of hiring in other rate-sensitive sectors, such as construction and housing.

 The Institute for Supply Management index on manufacturing surveys executives at goods-producing companies to signal the industry’s direction. An ISM index greater than 50 suggests that the manufacturing sector is in growth mode, consistent with an expanding economy. A number of less than 50 suggest a shrinking industry and an economy heading toward a downturn.

On Monday, ISM showed the industry at a precipice, with the manufacturing index at 50.9 in September, down from 52.8 in August. A key driver of the drop was factory employment, which fell below 50 and suggests a slowdown in hiring is under way.

Tuesday: A million fewer new jobs

For most of 2022, U.S. job vacancies have been near record highs as employers scrambled to find qualified workers. But data from the federal Bureau of Labor Statistics suggests that that tidal wave of demand is starting to ebb.

New job postings fell to 10.1 million in August from 11.1 million in July. That’s good news for Federal Reserve policymakers, who worry that the labor market has become unhealthy due to a substantial rise in unmet demand for workers.

It’s important to note that though employers posted fewer new job openings, the pace of hiring in August was largely the same. Job gains will stay solid, at least for now.

Wednesday: Pay growth ebbs for job changers

This is my favorite day of jobs week, because it’s when the APD Research Institute releases the National Employment Report.

We found that the economy produced 208,000 private-sector jobs in September, driven by professional business services, education and healthcare, and leisure and hospitality. Our data also reflected weakness among goods producers, aligning with ISM’s manufacturing data on Monday.

The NER also delivered new insights on pay. Annual salaries for people who had been in the same job for a year or more rose 7.8 percent in September, up from a revised 7.7 percent in August. This suggests that companies still are trying to retain workers by increasing pay.

But look at the people who changed jobs over the last 12 months. Pay growth for these job changers slid to 15.7 percent in September from 16.2 percent the previous month. It’s the first time since the pandemic that pay growth has decelerated for job changers. 

Job-changer salaries are more sensitive to current labor market conditions. While workers still are being rewarded for jumping ship to a new company, they might not be able to command the same big bump in pay going forward.

Thursday: Layoffs tick up

Every week, the government reports the number of people who file new claims for unemployment insurance benefits. The number is used by economists and market watchers as a real-time assessment of business health.

Last week, jobless claims rose by 29,000 from the previous week, to 219,000. 

Though the increase looks dramatic, it isn’t really. As with most weekly data, there’s a lot of volatility from week to week. For that reason, economists tend to average several weeks to smooth out these swings. The 4-week monthly average is 209,000, still low by pre-pandemic and historical levels.

Friday: Unemployment drops to a historic low

We closed the week with the headline number, the official government jobs report. Non-farm payrolls grew 263,000 in September, according to the BLS.

The gain was stronger than market watchers had expected and helped push the unemployment rate down to a historic low of 3.5 percent.

Though these numbers look good on the surface, the market reaction was decidedly bad. The S&P 500 fell by more than 2 percent as investors fretted that good news on the jobs front was bad news for inflation. 

The Fed’s playbook for defeating inflation is to reduce aggregate demand by increasing the cost of borrowing. With consumer and business demand still largely intact, the central bank is likely to continue raising interest rates aggressively, and keep them at those higher levels for some time to come. 

My Take

The totality of last week’s labor market data was positive, showing steady job gains and stable pay growth. 

The biggest miss of the week was the labor-force participation rate, which fell slightly in September after showing improvement in August. It’s still more than a percentage point below 2019 levels. 

And worker supply still hasn’t recovered from the pandemic. Even as we continue to see employment gains, there’s a risk that the U.S. workforce shrinkage is permanent. Even a week’s worth of solid job data can’t solve the riddle of why higher wages aren’t luring more people back into the labor market.