In the September 2023 Bureau of Labor Statistics jobs report, the whopping headline number is the overall payroll growth: 336,000 positions.
That is roughly twice what most economists were predicting. In addition, the moderate payroll growth we initially saw in July and August disappeared, as estimates were revised substantially upward. Over the past three months, payroll growth has averaged 266,000 workers — vastly more than what experts thought a month ago.
The data also suggest that the large increase in job vacancy rates in August — from 5.3% to 5.8% — is not just a statistical fluke. The labor market seems to have regained some strength, after months when it appeared to be cooling.
But does this mean the Federal Reserve should resume major interest rate increases to slow the labor market down? I say not so fast.
There are additional data in this report and others that suggest more moderation than the payroll numbers. For one thing, most of the payroll growth was concentrated in just three sectors: leisure/hospitality (96,000), government (71,000), and health care (41,000). Growth in all the other sectors was quite moderate — specially in those like construction and manufacturing, which are sensitive to interest rates. Increases in transportation/warehousing were also very modest (9,000), suggesting consumer demand for durable goods has really cooled.
The numbers in the household survey also did not match the payroll numbers. Virtually all numbers on workers — such as the unemployment rate and labor force participation — held steady. While the participation rate did not grow, some increases from months remained, perhaps creating enough new workers to fill the jobs that employers are still creating.
And, most importantly, wage growth has moderated. Average hourly wages rose by just 7 cents last month — or 2.5% on an annualized basis. Over the past two months, they have risen just 2.7%. In contrast, wage growth over the past year averaged 4.2% — a clear indication that wage growth is slowing down.
When we look at the inflation measures the Fed takes most seriously — the core Personal Consumption Expenditures rate — that has been very moderate for at least 4 months, averaging just 0.2% per month (or about 2.5% over the year). Productivity growth bounced back recently, and has averaged more than 1% in the past four quarters. This implies that wages can grow more rapidly than inflation without contributing more to rising costs, so the labor market is not a big problem right now.
The outlook for the remainder of 2023 and all of 2024 is very uncertain. Will there be enough workers to fill the jobs employers are creating? One slightly worrisome number in this report is that female labor force participation ticked down slightly in September (though for men it ticked up). As the child care subsidies in Covid-19 pandemic relief plans end, it might be harder for mothers with small children to find the affordable care they need, perhaps somewhat depressing their labor force activity. What happens to immigration might matter a lot in this case, too.
But, overall, large payroll growth is concentrated in just a few sectors, and it is not translating into high wage growth. This gives the Fed some reason to pause before continuing to raise interest rates (beyond the one that will likely come before the end of the year).
Let’s see how the labor market trends in the next several months before we rush to judgment.
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