The September employment survey released by the U.S. Bureau of Labor Statistics on October 7 showed job growth slowing—from “very strong” to “still pretty darn strong.” Payrolls rose by 263,000 on the month, well below the 488,000 average over the previous 12 months but still well above the 168,000 monthly average in the economic expansion of 2009–19. Moreover, job growth remained way above the 50,000–100,000 monthly average that is compatible with maintaining a stable unemployment rate. The unemployment rate dropped from 3.65% to 3.49% in the previous month.
Growth remained strong in both goods producing and service-producing industries. Notable employment shortfalls remain in leisure and hospitality, other (personal care) services, and state & local government. In aggregate, there are roughly 2.5 million fewer jobs in those sectors than there were at the previous peak in February 2020.
One positive note in the September report was a modest 0.3% increase in average hourly earnings (AHE). That was below the average of the past 12 months and suggests that labor cost pressure is not increasing nearly as fast as the labor market is tightening. The problem, however, is that AHE have not tracked more robust measures of labor costs, such as the quarterly employment cost index (ECI) very closely in recent periods and thus have understated the cost pressure employers are under. The third quarter ECI release in late October will bear careful watching.
After ticking up 0.3% in Aug. the labor force participation rate dropped 0.1%, to 62.3%, in September. The drop was due to falling participation among prime age women, a group that has flocked back to the labor market in disproportionately large numbers. And while the numbers for the other subgroups in the labor force tracked in the BLS data are very volatile from month-to-month, it is clear that the long-term demographic factors driving labor force participation lower are offsetting the cyclical economic factors driving it up. Moreover, those cyclical forces could be much weaker than usual as falling real wages improve the value of work outside the marketplace compared to work in formal jobs.
In any event, the U.S. Federal Reserve (Fed) has focused closely on labor supply and the relationship it has to the economy’s potential growth rate. The fact that it is recovering so slowly suggests that 1.8% potential output growth may be an overestimate of trend expansion in aggregate supply and that an even greater slowdown in aggregate demand may be necessary to restore the balance needed to maintain stable inflation.
Fed Policy Implications
From the Fed’s point of view, a further tightening of the labor market, as demonstrated by the drop in the September jobless rate, implies that aggregate demand growth is still too strong to provide lasting relief on the inflation front. Thus, the September jobs report should keep the Fed firmly on its current policy path, with another 75-basis point increase in the fed funds rate likely at its next policy meeting in November.
