VTI - September Jobs Report Won't Stop The Fed From Hiking Interest Rates

2023-10-06 16:45:45 ET

Summary

• The economy created 336,000 jobs in September and averages 267,000 jobs per month over the past year, above the pre-pandemic trends.
• The labor shortage persists with 3 million more job openings than unemployed individuals.
• While hope remains that labor force participation will increase, demographic data states otherwise.

Earlier today, the Bureau of Labor Statistics released the September employment report showing that the economy created 336,000 jobs last month, which was far higher than the consensus. The report also placed upward revisions on the prior month's data. With the new data and revisions, the economy is averaging 267,000 jobs created per month over the last 12 months, which is far above pre-pandemic levels. A deeper dive into the report shows signs of normalization, but not softening.

The job openings and labor turnover survey, or JOLTS , earlier this week did not help prime markets for the report, as it indicated more job openings growth in August than growth in number of unemployed individuals. While the labor shortage has trended better over the past twelve months, there remain 3 million more job openings than unemployed persons, which is unprecedented when examining the health of the labor market across the last generation.

The unemployment rate did remain at 3.8% after jumping there last month, but the U6 rate, which is the most comprehensive measure of unemployment that includes the unemployed plus those marginally working and seeking more hours, fell from 7.1% to 7.0% in September. This is 0.4% higher than the lowest point of this business cycle, but only 0.2% higher than the pre-pandemic business cycle, indicating a still restrictive/strong labor market.

The duration of unemployment data continued to show a mixed picture in September. The average duration of unemployment did rise noticeably from 20.4 weeks in August to 21.5 weeks in September, indicating that individuals are staying unemployed for longer. By comparison, the average duration of unemployment in 2019 was 21.7 weeks. Despite the extension of the average length of unemployment, the number of persons unemployed for over 27 weeks fell by 80,000 to 1.216 million in September.

One silver lining for the "soft landing" crowd lies within the wage data. For the second consecutive month, average hourly earnings rose at a rate of 0.2% month over month. These are the two lowest readings in the last twelve months and have helped contribute to the year-over-year increase in average hourly earnings falling to close to 4%. Since the changes in wages have recently mirrored the changes in inflation, and wages are a huge determinant of consumption, there's some hope that inflation will normalize.

With the hope of a soft landing, some are pointing to labor force participation as a possible source of softening the labor market. When COVID hit, 5 million people left the labor force from March to December 2020. Since then, only 1 million have re-joined, half of which came in the August jobs report. The hope is that more people will re-enter the labor force, balance the labor market, help lower wage increases, and stabilize prices. The fact is that the number of adults not in the labor force has rarely held below its 36-month moving average for long.

Another reality is that most of the people who left the labor force were over the age of 55 and likely retired, never to return to work. This is indicated by the fact that the labor force participation for adults over the age of 55 is 38.8%, below the 40.3% level recorded prior to the pandemic. Conversely, adults aged 25 to 54 have a labor force participation of 83.6%, notably higher than the 83.1% pre-pandemic level. Judging by the current demographic situation in the United States, we're more likely to see the number of adults not in the labor force grow over the next five years.

There's nothing in the September jobs report that should give an indication that the Fed is done with rate increases. Even the softest of pieces of data (average hourly earnings and average duration of unemployment) were at their respective levels during the strongest points of the labor market in previous business cycles. Investors are right to brace themselves by selling Treasury bonds and preparing for interest rates to be above normal for much longer.

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