November 02, 2022
(The monthly Employment Situation is scheduled for release by the Bureau of Labor Statistics on Friday, November 4th, at 8:30 AM Eastern Time.)
The biggest question in the October jobs report is whether wage growth will continue at the modest pace we saw in both August and September. In those two months, the average hourly wage increased at just a 0.3 percent monthly rate. The annualized rate of wage growth over those two months was just 3.6 percent. This is only a hair higher than the 3.4 percent of wage growth we saw in 2019 when inflation was comfortably below the Fed’s 2.0 percent target.
The monthly data are erratic and subject to revisions, so we always have to be cautious about making too much of one month or even two months’ data. However, if we see a third month of modest growth in the average hourly wage, it is difficult to ignore. We have to accept it is a real possibility that the economy is now on a path of noninflationary wage growth. This would also be consistent with the sharp slowing of wage growth in the Employment Cost Index for the third quarter.
Wages are a central point in the battle against inflation. If the average hourly wage is growing at a 3.6 percent annual rate, or something close to it, it is almost impossible to imagine sustaining a rate of inflation that is much above 2.0 percent. We have already seen a sharp shift from wages to profits during the pandemic. If inflation remained elevated, even when the pace of wage growth remained moderate, it would imply an unprecedented redistribution from wages to profits. That is not impossible, but probably not something most economists would consider likely.
In short, if wage growth remains moderate in the October data, there is a solid case that the Fed’s work is done. While the Fed may not commit itself to lowering interest rates or even holding them steady, there would be a very good argument for pausing to see if other data are consistent with the slower pattern of wage growth.
Slowing Job Growth
The economy added 263,000 jobs in September. This is far slower than the pace seen earlier in the year, but probably still too fast to be sustainable in an economy that is near full employment. Also, given evidence of weakening in several sectors, such as slower growth in consumer spending, it is likely faster than the current growth in the economy would require.
This month’s figure will likely be closer to 200,000. Construction, health care, and restaurants seem like especially good candidates for a slowdown. In the case of construction, interest rate hikes have sharply slowed housing starts. We are still at a pandemic recovery high in homes under construction, but the slower starts will eventually lead to fewer workers.
In the case of health care and restaurants, we saw extraordinary job growth in September, with both sectors adding 60,000 jobs. We should see reasonable job growth again in October, but likely close to half as large.
Hours Likely to Remain Stable
There was a large increase in the length of the average workweek early in the recovery, as employers, unable to find workers, got their existing workforce to put in more hours. It has fallen back to pre-pandemic levels in recent months.
If we are starting to move towards a recession, we might see a shortening of the workweek, especially in manufacturing, where employers may cut hours instead of shedding workers. But, given other data, it does not seem we are at this point yet.
Labor Force Participation Rate (LFPR)
The overall rate of labor force participation edged down by 0.1 percentage point in September, from the recovery high reached in August. The rate for prime age men (ages 25 to 54) rose by 0.2 percentage points to 88.8 percent, a new high for the recovery. The LFPR for prime age women fell by 0.6 percentage points to 76.6 percent, 0.3 percentage points below the pre-pandemic peak. These monthly changes are primarily noise, but the general direction is likely to be up, at least as long as the economy is still creating jobs at a healthy pace.
Black and Hispanic Unemployment to Remain Low
The unemployment rate for Black workers fell to 5.8 percent in September, which tied for the lowest rate in the recovery to date. The unemployment rate for Black teens fell to 12.7 percent, the second lowest ever, and lower than any pre-pandemic level. The unemployment rate for Hispanics fell to 3.8 percent, the lowest rate on record.
These groups are among those that benefit most in a strong labor market and see the worst effects of a weak labor market. If there is a notable weakening in the labor market, we are likely to see it first among those most disadvantaged in the labor market, with the qualification that single-month data are erratic.
Share of Unemployment Due to Quits Likely to Fall
The share of unemployment due to people voluntarily quitting their jobs rose to 15.9 percent in September, a record high. This number is erratic, so it would likely fall even if labor market conditions were unchanged. However, with some data showing a weakening of the labor market, like a rising share of workers getting unemployment benefits, it is likely we will see this number drop in October.
Improved Job Growth in Sectors Having Troubles Hiring
Several sectors have notably lagged in regaining employment in the recovery, mostly because they have difficulty competing for workers. State and local government employment is the biggest sector in this category, with employment still more than 500,000 below pre-pandemic levels. Employment in child care and nursing homes is also well below the February 2020 level.
State and local governments went backward in September, reporting losses of 16,000 and 11,000 jobs, respectively. However, this was likely an issue of seasonal adjustment problems associated with changing the time for school reopenings. They should be back on a positive path in October.
Nursing homes have been adding back jobs at a modest pace, while the child care sector lost a small number of jobs in the last two months. If the labor market is in fact weakening, we should see at least modest growth in both sectors.
Overall Picture: Strong and Stabilizing Labor Market
There is no reason to expect a notable deterioration in the labor market in October, although we can never rule out the possibility that unemployment will edge higher. We should see job growth declining towards a sustainable pace and wage growth continuing to moderate.