The U.S. labor market is a very important factor in determining the direction of interest rates going forward. As financiers anxiously await the release of the October jobs report this Friday, economic data is pointing to the possibility of slowing job growth in the United States. After a noticeably strong September, labor statistics are expected to show a modest pace of job additions.
A look at U.S. labor market projections
Projected job growth and unemployment rate
The U.S. Bureau of Labor Statistics will release its monthly labor report at 8:30 a.m. ET (9:30 p.m. PT), which is expected to show that nonfarm payrolls increased by 180,000 in October. This is down significantly from the 336,000 jobs added in September. Despite this expected slowdown, the unemployment rate is expected to remain at 3.8%, similar to the September figure.
Wage trends and hours
Another key metric that is gaining traction is wage growth. According to the forecast, average hourly earnings are expected to increase by 0.3% month-over-month, up slightly from 0.2% in the previous month. However, if you look at the year-over-year numbers, it’s expected to drop from 4.2% to 4.0%. The average workweek is expected to remain unchanged at 34.4 hours.
Analyzing the Labor Hours variable
Insights from economists
Nancy Vanden Houten, chief U.S. economist at Oxford Economics, expects job growth to slow significantly in the October report. She notes that this slowdown may have been exaggerated by the auto workers’ strike. Excluding these workers, job growth still appears to be relatively robust, albeit concentrated in certain sectors.
The Fed’s Perspective
Federal Reserve Chairman Jerome Powell has acknowledged this, citing a possible cooling in the labor market as a requirement for inflation to continue its downward trend. “To fully restore price stability, growth will need to slow somewhat and labor market conditions will need to ease somewhat,” he said.
Wages play a crucial role in how the labor market affects inflation. According to ADP’s private wage data, annual wage growth for workers who change jobs fell to the slowest pace since July 2021. Similarly, wage growth for workers who kept their jobs slowed to its slowest pace since September 2021.
Chairman Powell noted that overall wage trends have aligned more closely with levels consistent with 2% inflation over time, a positive development for the central bank.
Implications for the Federal Reserve and Markets
Market reaction and forecasting
The release of the jobs report coincides with a key moment for markets, which have been rallying following the Fed’s recent policy decisions. Investors are interpreting Powell’s recent comments as suggesting that the Fed may refrain from raising rates in December. Currently, market prices reflect an 80% probability that the Fed will keep rates unchanged at its next meeting, which is a big change from just a month ago.
The bigger economic picture
Ellen Zentner, chief U.S. economist at Morgan Stanley, emphasizes the importance of considering the entirety of the data when predicting Fed moves. She points out that even if certain data thresholds are met, the Fed could keep rates on hold if financial conditions remain tight. In addition, factors such as rising labor force participation, rising unemployment, and slower wage growth could offset the backlash from large wage increases.
Conclusion
As we look ahead to the October employment report, predictions of slowing job growth and stabilizing unemployment highlight the complex dynamics of the U.S. labor market. While some indicators suggest a softening employment environment, inflation and the broader economic implications of Federal Reserve policy remain top of mind for analysts and investors. Upcoming economic data will play an important role in understanding the current state of the US economy and its future trajectory.
