Blowout employment report is a win for the American real economy

REAL ECONOMY BLOG | October 06, 2023

Authored by RSM US LLP

The U.S. September employment report, with a surprising gain of 336,000 jobs, surely exaggerates the true underlying pace of hiring that remains quite strong but not at the robust levels implied by the monthly Bureau of Labor Statistics estimate released on Friday.

Once one considers the upward revision of 119,000 in hiring over the past two months, total employment over the past three months has averaged 266,000, and 233,000 over the past six months.

From our perspective, those figures represent a strong and healthy labor market that may slow but not fade significantly in the near term.

Most important, average hourly earnings increased by 0.2% on the month and were up by 4.2% on a year-ago basis.

Over the past three months, average hourly earnings have increased by an average of 2.6%, which implies further relief on wage and inflation pressures for firms.

From our vantage point, the fact that the economy continues to add workers at a strong pace as earnings growth eased is an encouraging sign that supports our call of a soft landing to the economy.

The strong pace of hiring reflects what we expect will be a rate of growth that exceeds 3% during the third quarter and supports our contention that the economy will run hot over the next few years. Firms and households are adjusting to interest rates that have gone up and will remain higher, reflecting the significant structural adjustments in the domestic and global economies.

The unemployment rate was 3.8% in September, the same as August, and the duration of unemployment was only nine weeks. Prime-aged employment for workers who are 25 to 54 stands at 83.5%, with 89.6% of men and 77.4% of women in that cohort employed. That figure remains at or near multidecade highs, reinforcing the idea that even as the churn in the labor market eases, jobs remain plentiful.

Policy implications

Our sense is that the recent noise in the labor data will not alter the direction of monetary policy at the Federal Reserve.

We have made the case that the Fed should not hike its policy rate any further as financial conditions tighten. Rising yields will curb the appetite for risk across financial markets and the real economy.

Our quick back-of-the-envelope estimate implies that recent tightening in financial conditions driven by rising bond yields is the equivalent of slightly more than a 25-basis point rate hike. For this reason, the central bank is well positioned to remain on hold at both its November and December meetings.

The data

Strong gains across the board reflect the underlying resilience of the American real economy. The goods-producing sector added 29,000 jobs in September as the manufacturing sector added 17,000 and construction 11,000.

Overall private service jobs increased by 234,000, which was driven by the addition of 96,000 leisure and hospitality jobs, 73,000 government jobs—of which 67,000 were at the state and local level—70,000 private education and health jobs, and 45,000 trade and transport jobs.

Retail trade added 20,000 jobs, professional business services 21,000 and the financial sector 3,000 on the month. The information sector reduced headcount by 5,000, and there were 4,000 fewer temporary workers in September.

Aggregate hours worked increased by 0.2% on the month and were up by 1.5% at a three-month average annualized pace.

Overtime increased by 3.1 hours while manufacturing hours advanced by 0.2%. The labor force participation rate remained steady at 62.8% while the civilian labor force increased to 167.9 million on the back of an additional 90,000 workers who re-entered the labor force in a higher-wage environment.

There are currently 6.4 million people who are unemployed. In September, the number of people not in the labor force who wanted a job was 5.5 million, little different from the prior month. The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.2 million in September. The long-term unemployed accounted for 19.1% of all unemployed people.

The takeaway

The American labor market remains historically tight and jobs are plentiful.

Upward revisions to recent data show that the labor market remains solid even as wage gains continue to cool and are likely to ease further.

The economy needs to generate only 75,000 jobs per month to stabilize the unemployment rate. That figure stands in stark contrast with the 150,000 to 200,000 positions that the economy needed to generate per month a decade ago to obtain that same objective.

Given that full employment is about 4%, even as wage pressures and overall inflation continue to ease, is a solid sign for the U.S. economy.