US: As unemployment falls and employment rises, pressure on the Fed increases

Nonfarm payrolls increased by 263,000 in September after gains of 315,000 in August. Unemployment rate unexpectedly dropped to 3.5%, reaching the lowest level in the last five years. Average hourly earnings also rose strongly. Median estimates were for a 255,000 increase in employment and the unemployment rate holding steady at 3.7%. The data showed employers continued to hire at a solid pace last month and the unemployment rate unexpectedly returned to a historic low. This points to a robust labor market that could put the inflation-driven Fed on another course of major rate hikes.

If we look at the sub-items; recruitment was relatively broad-based, led by gains in leisure, accommodation and healthcare. The labor force participation rate of the working or job-seeking population decreased from 62.4% to 62.3%, explaining the decrease in the unemployment rate. While private sector employment came in at 288K, above the market expectation of 275K, it is observed that the broadly defined unemployment rate decreased from 7% to 6.7%. In September, the average working hours for all workers in the private non-farm sectors was 34.5 hours for the fourth consecutive month. In manufacturing, the average workweek for all workers remained unchanged at 40.3 hours, with overtime kept at 3.2 hours.

Job Growth Remains Solid. US jobs beat forecasts for sixth month; unemployment rate is falling

Entertainment and accommodation added 83,000 jobs in September, in line with average monthly job earnings for the first 8 months of the year. Employment in health services increased by 60,000 in September, returning to February 2020 levels. Manufacturing employment continued to rise in September (+22,000). Wholesale trade employment continued its upward trend in September (+11,000). In September, employment in the construction sector continued to rise (+19.000) in line with the average monthly employment increase in the first 8 months of this year. Employment in transport and warehousing was little changed in September (-8,000). Employment was little changed during the month in other major industries, including mining, retail trade, information, other services and government.

The employment report showed average hourly earnings rose 0.3% from August and 5% year-on-year, a slight slowdown from the previous month but still historically high. The solid increase indicates that the Fed should continue to raise interest rates as it aims to rein in the rapid wage growth that supports household spending.

The numbers confirm the strength of the US job market and are somewhat unexpectedly strong. Of course, September is a month with typical fluctuations and deviations in terms of the intersection of the back-to-school and hiring period. While there are some indications that labor demand has moderated – most notably the recent decline in job postings – employers, many of whom are still understaffed, are hiring at a solid pace. This power not only supports consumer spending, but also supports wage growth as businesses compete for a limited pool of workers. This nature of the data also does not confirm a qualitative recession, leaving the GDP contraction seen in 1Q22 and 2Q22 in the “technical recession” region. In this respect, the view that prioritizes inflation by saying that the contraction in GDP can be ignored and that the economic activity is strong enough is gaining strength.

If we look at the Fed's point of view; Central bank officials have been clear lately about their commitment to taming inflation, even if it leads to higher unemployment and recession, because they say not doing so would be worse for Americans. Fed Chairman Jerome Powell said last month that slower growth and a softer labor market were painful for the public, but there was no 'painless' way to curb inflation. Inflation and wage problems are likely to increase unemployment as financial conditions tighten and operational uncertainties increase in economic terms.

The Fed hopes to see a significant softening in labor market conditions, with the goal of cooling wage growth and ultimately inflation. While the job growth is the smallest increase since April 2021, policymakers want to see if rate hikes lead to a rise in the unemployment rate. This is the last business report Fed officials will have before their November policy meeting as they are considering a 75 basis point rate hike in a row. Fresh inflation data to be released next week will also play an important role in their decision making. The report is expected to show the depth and breadth of the Fed's inflation problem, with a key indicator of consumer prices potentially worsening. However, even though the CPI is low, the Fed will not withdraw the interest rate increase perspective as it focuses on the sticky effects of inflation.

Treasury yields rose as the strong report reaffirmed bets that the central bank will continue to be aggressive in its tightening campaign. After the data, the probability of a 75 basis point increase has risen to almost certainty. Fed pivot expectations also remain in the background, and the opinion that the terminal interest rate should be revised towards 4.5%, towards 5% gains strength.

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