Weekly Update 10/04/2024: US Economy Adds More Jobs in September than Expected While Unemployment Rate Moves Lower

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Domestic Economic News

US job growth last month topped all estimates, the unemployment rate unexpectedly declined and wage growth accelerated, reducing the odds the Federal Reserve will opt for another big interest-rate cut in November. Nonfarm payrolls increased 254,000 in September, the most in six months, following an upwardly revised 72,000 advance over the prior two months. The unemployment rate fell to 4.1% and hourly earnings increased 0.4%, according to Bureau of Labor Statistics’ figures released Friday. Combined with data earlier this week showing that demand for workers is still healthy while layoffs remain low, the payrolls report is likely to alleviate concerns that the labor market is cooling too quickly. Fed Chair Jerome Powell this week reaffirmed that shielding the labor market was part of the reason why the Fed decided to kick off its easing cycle with a larger rate cut in September. Powell and his colleagues believe no further cooling is needed to bring inflation down to the Fed’s 2% target, he said. Stock futures, the dollar and Treasury yields rose after the figures. Pricing in the swaps market showed traders paring bets on a Fed interest-rate cut larger than a quarter-point in November. Fed officials also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. Hourly earnings rose 4% from a year ago, the biggest advance in four months. Wage growth for production and nonsupervisory employees, cooled to 3.9%. The gain in hiring last month was driven by leisure and hospitality, as well as health care and government. The payrolls diffusion index, which measures the breadth of changes in private employment, rose to the highest since the start of the year. The latest jobs report showed the so-called underemployment rate — which includes those working part-time for economic reasons and discouraged workers — fell to 7.7% in September, the first decline in nearly a year. The participation rate — the share of the population that is working or looking for work — held at 62.7% for a third month. The rate for workers ages 25-54, also known as prime-age workers, dropped to 83.8%. While layoffs haven’t been a main feature of the labor-market cooling in the US, they’re picking up in other countries. Samsung Electronics Co. is laying off workers in Southeast Asia and Oceania as part of a plan to reduce global headcount, and Volkswagen AG is both trimming positions in China and mulling plant closures at home in Germany. The US right now remains the primary engine of global growth thanks to our resilient economy.

US job openings rose in August to a three-month high, a development at odds with other data indicating slowing demand for workers. Available positions increased to 8.04 million from 7.71 million in July, led by the biggest jump in construction openings since 2009 as well as increases in the state and local government sectors, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey showed Tuesday. The median estimate in a Bloomberg survey of economists called for 7.69 million openings. At the same time, the hiring rate declined to 3.3%, matching the lowest reading since 2013 excluding the onset of the pandemic in 2020. Retail trade and transportation and warehousing registered the biggest declines. The report showed the layoffs rate also remained low, painting a mixed picture about the state of the labor market. Federal Reserve officials cut interest rates by 50 basis points at their September meeting in part to guard against a further slowdown, and have said they could authorize another half-point cut in November if weakness continues. A separate report published Tuesday by the Institute for Supply Management showed manufacturing activity contracted in September for a sixth straight month. The number of vacancies per unemployed worker, a ratio the Fed watches closely, held near a three-year low at 1.1. At its peak in 2022, the ratio was 2 to 1. The so-called quits rate, which measures the percentage of people voluntarily leaving their jobs each month, fell to 1.9%, the lowest since June 2020. That suggests people are less confident in their ability to find a new position than they were a couple years ago. Hiring picked up pace for the first time in six months, pointing to a rebound in the U.S. economy.

The private sector added 143,000 jobs in September, rising from an upwardly revised 103,000 in August, according to the ADP National Employment report released Wednesday. That ends five straight months of slowdown in the U.S. jobs market, and beats economists' forecasts for a 128,000 rise in new jobs. Manufacturing, a sector that has struggled this year, added new jobs for the first time since April, suggesting America's factories are beginning to see green shoots of recovery. Service providers booked a stronger rise, at more than 100,000, with information services the only category booking a decline in positions. All regions of the country except one, namely the east south central region, similarly booked stronger hiring over September, the report showed. "Stronger hiring didn't require stronger pay growth last month," said Nela Richardon, ADP's chief economist. That is good news on the inflation front.

US service providers expanded in September at the fastest pace since February 2023, driven by a flurry of orders and stronger business activity. The Institute for Supply Management’s index of services advanced 3.4 points to 54.9 last month, the group said Thursday. Readings above 50 indicate expansion, and the latest figure exceeded all projections in a Bloomberg survey of economists. The group’s new orders gauge jumped 6.4 points, the most since the start of 2023. Combined with a four-month high in a measure of business activity, which parallels the ISM’s factory output gauge, the data suggest the economy was on solid footing at the end of the third quarter. “Amid robust consumer spending, the large services sector continues to add backbone to the expansion, likely weighing toward a smaller quarter-point rate cut from the Fed in November,” Sal Guatieri, senior economist at BMO Capital Market, said in a note. “But there are still a lot of data to come and the dockworkers’ strike is a wildcard.” Treasury yields remained higher and the S&P 500 fluctuated after the figures as traders weighed the positive report against the risk of escalating conflict in the Middle East. Twelve industries reported growth last month, led by real estate, management of companies and support services, and accommodation and food services. The outlook in the coming weeks is clouded by the impact from the strike of dockworkers at East and Gulf coast ports, which if prolonged could weigh on many industries, as well as the November Presidential election. “The stronger growth indicated by the index data was generally supported by panelists’ comments; however, concerns over political uncertainty are more prevalent than last month,” Steve Miller, chair of the ISM Services Business Survey Committee, said in a statement. In our view it does demonstrate how the US economy remains remarkably resilient and by far the strongest economy in the world right now.

US dockworkers agreed to end a three-day strike that had paralyzed trade on the US East and Gulf coasts and threatened to become a factor in the presidential election. The International Longshoremen’s Association and the US Maritime Association extended their previous contract through Jan. 15, the two groups said in a joint statement Thursday. Work will restart Friday morning and the two sides will restart negotiations on a long-term agreement, which will include a pay increase of about 62%. Fears of a sustained emergency swelled through the week, with analysts and industry officials warning that the disruption would quickly extend beyond the containerized imports, exports, and autos impacted directly by the walkout. Estimates of the cost to the US economy ranged from $3 billion to $5 billion per day. “The strike is over,” ILA Local 333 President Scott Cowan told a CBS affiliate just after delivering the news to members gathered at the picket line outside the Port of Baltimore. The agreement gives the ILA and USMX — as the group of terminal operators and shipping liners is known — time to resolve even more contentious issues without threatening the US economy just weeks ahead of the election. Shares of shipping lines in Asia fell as the suspension of the strike damped expectations that container rates would rise due to reduced capacity.

Interest Rate Insight and the Fed

Traders slashed their bets on the pace of future Federal Reserve interest-rate cuts after September US employment data blew past estimates and signaled a robust hiring trend. The chance of a half-point rate cut in November was priced out, with the contract showing 25 basis points of easing now expected. Swap contracts tied to the outcome of future Fed meetings were pricing in only about 55 basis points of rate cuts for November and December combined, a drop of 10 basis points after the jobs report. Policy-sensitive two-year Treasury yields initially rose as much as 17 basis points to 3.87%, the biggest jump since April 10. Meanwhile, the 10-year note climbed 12 basis points to 3.96%. European bonds followed Treasuries sharply lower. German two-year notes erased this week’s gains, with the yield spiking as much as 13 basis points to 2.21%. Traders pared bets on rate cuts from the European Central Bank and the Bank of England. The broader outlook remained unchanged though, with the market pricing between five and six quarter-point reductions through next year.

Impactful International News

Euro-area inflation slowed below the European Central Bank’s 2% target for the first time since 2021 — backing investor bets that interest rates may be lowered more quickly than previously anticipated. Consumer prices rose 1.8% from a year ago in September, down from 2.2% in the previous month as energy costs fell sharply, Eurostat said Tuesday. The reading matched a Bloomberg survey of analysts — as was core inflation, which eased to 2.7%. The data will reinforce the growing conviction among investors that the ECB must loosen monetary policy more speedily to account for a stuttering economy and unexpectedly rapid disinflation. President Christine Lagarde hinted as much on Monday, telling European Union lawmakers that officials will take growing optimism on consumer prices into account at their next decision on Oct. 17. The euro traded 0.4% lower at about $1.109, retreating from a near two-year high. Money markets now see an almost 90% chance that this month’s meeting will bring a third reduction of the year in rates. Another quarter-point move is likely to follow when policymakers convene in December for the final time in 2024. That would bring the deposit rate down to 3% from 3.5% currently. Economists have adjusted their rate calls as well, with Goldman Sachs and JPMorgan among the slew of Wall Street banks to now predict a step this month. “We expect the ECB to start a series of back-to-back cuts by 25 basis points in October,” Morgan Stanley economists led by Jens Eisenschmidt said in a note. “Upon reaching 2.5% in March we expect it will slow down and revert to a more gradual cutting schedule with a cut at every projection meeting.” The ECBspeak Index from Bloomberg Economics shows that dovish sentiment has dominated since the start of the summer. Faster monetary easing began to be factored in after business surveys by S&P Global last week surprisingly showed the euro-zone economy contracting in September, with demand weakening and price pressures easing. Reinforcing that idea, national data from Germany, France and Spain showed inflation moderating beneath 2%. The headline numbers, though, are being depressed by volatile energy costs and will probably increase again toward year-end. And other gauges are stubbornly high. Services inflation — a metric that officials have focused on to determine the strength of domestic price pressures — only dipped to 4% in September from 4.1% the previous month. Wage growth, a major driver of services costs, has been sticky but has started to ease. ECB Chief Economist Philip Lane expects that trend to continue once workers’ pay has made up for the loss in purchasing power seen in recent years. Lagarde acknowledged these developments in her hearing, saying “we have reasons to believe that services is also beginning to abate, slowly and gradually, so we are heading in that direction of reduced inflation.” This was good news this week on the inflation front!

Company Events

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