The Market Today
Evidence of Obstacles in Labor Market Recovery
by Craig Dismuke, Dudley Carter
Nonfarm Payrolls Disappoint Expectations: The economy recovered only 194k nonfarm payrolls in September, disappointing expectations of recovering 500k, in the last payroll report before the Fed meets again on November 3. Positive revisions of +169k, cumulatively, to July and August results were encouraging but only made the decline in September look more abrupt. Part of the weakness stemmed from a 123k decline in government jobs as fewer teachers returned to work than normal. Local education payrolls fell 144k (on a seasonally adjusted basis) as only 718k teachers went back into work versus a 5-year pre-pandemic average of 848k. The private sector recovered 317k payrolls, still below expectations for 450k jobs. The reopening theme was evident in the private sector. The leisure and hospitality sector gained 74k jobs as restaurant payrolls increased 29k, amusement and gambling jobs gained 17k, and performing arts and spectator sports recovered 24k. Restaurant payrolls remain 931k below their pre-pandemic level. Also evidencing reopening activity, retail added 56k payrolls and transportation added 47k. There remain 4.97mm lost payrolls since the beginning of the pandemic.
Unemployment Rate Drops As More People Employed, Younger Workers and Females Drop Out: In the household report, the unemployment rate fell from 5.19% to 4.76% as 526k more people reported as employed, 710k fewer people reported as unemployed, and 338k more people reported as not being in the labor force. This brought the participation rate down from 61.7% to 61.6%. Particularly hard hit were younger workers and females. Labor participation increased in all age cohorts except 16-19, 25-34, and 35-44 year olds. Those three age cohorts reported 113k fewer employed and 374k fewer people in the labor force. There were 362k fewer females reporting as being in the labor force. According to supplemental data to the report, “5.0 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic–that is, they did not work at all or worked fewer hours at some point in the last 4 weeks due to the pandemic. This measure is down from 5.6 million in August.” At 4.8%, the unemployment rate is now already at the level the Fed expected by year-end with three months still remaining.
Wage Growth Shows Further Evidence of Tight Labor Market: While headline payroll growth was disappointing, wage growth evidenced continued tightening of the labor market. Average hourly earnings rose 0.6% MoM bringing the year-over-year rate up to 4.6%. Leading the way was a 1.5% MoM gain in education and healthcare wages. On top of increase earnings, average weekly hours worked increased from 34.6 to 34.8, a high level by historical standards.
Impact on Taper Decision: While the headline payroll number disappointed expectations, the cumulative results show an ever-tightening labor market. The imbalances which have defined the labor recovery in recent months remain an issue. While the Fed would have preferred a strong recovery of jobs, the pressure evident in the labor market may well be enough to convince them to proceed with slowing asset purchases in November. Fed officials’ upcoming speeches will now take on more significance.
YESTERDAY’S ECONOMIC NEWS
Consumer Credit Grows at Slowest Rate in Seven Months: Consumer credit expanded by $14.4b in August, a smaller increase than was expected and the slowest expansion of non-real estate credit balances since a $1.7b contraction in January. The 4.0% annualized increase in total credit was driven by increases of 3.6% in revolving balances and a 4.1% increase in non-revolving categories. The slower growth in revolving types, primarily credit card balances, is consistent with trends showing some loss of economic momentum in August. A stepped down pace of activity in the non-revolving bucket, which includes auto loans, would be impacted by the continued weakness in auto sales.
Fed’s Mester Expects Inflation Will Moderate, But “Attuned” to Risk It Won’t: Cleveland Fed President Mester acknowledged Thursday that the inflation outlook is clouded by uncertainty. While she continues to believe that current inflation pressures will moderate, she admitted that risks are to them remaining higher. Mester, who will vote on policy during 2022, believes the labor market will reach levels consistent with maximum employment near the end of next year, implying she could support a rate increase prior to 2023.
Risk-On’s Return Lifts Stocks and Drives Treasury Yields Higher: Risk-on was Thursday’s flavor du jour as subsiding energy prices lifted global shares and a solid unemployment claims report combined with a deal to delay the debt ceiling fight to drive the major U.S. equity indexes sharply higher. Stocks rose more than 1% across Asia and Europe’s Stoxx 600 closed with a 1.6% gain. U.S. equities opened higher against the stronger global backdrop and following a welcomed drop in jobless claims ahead of this morning’s labor report. News that Senate leadership had struck a deal to delay the debt ceiling fight until early December kept prices propped up, although the indexes closed near session lows. Reflecting the day’s strength, the S&P 500 added 0.8%, trailing roughly 1% gains for the Dow and Nasdaq. Notably, a jump in Treasury yields didn’t hinder equities’ strong performance. Yields rose early and continued to climb throughout the day. The 2-year yield rose 1.2 bps to 0.31%, a new high since March 2020. The 5-year yield added 4.1 bps to 1.02%, a high since February 2020. The 10-year yield moved up 5.2 bps to 1.57%, its highest mark since June 16.
U.S. equities leveled off early Friday as oil prices jumped again and Treasury yields inched higher ahead of this morning’s jobs report with sovereign yields moving up. U.S. equity index futures hovered just inside of positive territory for majority of the overnight session. The tone remained firm in Asia following strong gains for Europe and the U.S. on Thursday. Chinese equities posted solid gains in their return from a four-day holiday break. Data released on Friday showed China’s services sector bounced back more than expected in September from its weakest month since early in the pandemic. The Caixin Services PMI rose from 46.7 to 53.4, topping expectations of 49.2. Momentum, however, has dwindled during European trading, leaving the Stoxx Europe 600 down 0.1%. Energy prices bounced Friday, pushing U.S. WTI back up to a seven-year high near $79 a barrel. Treasury yields were off higher levels from earlier in the session approaching the release of the September jobs report. Trailing larger increases across Europe, the 2-year yield was flat at 0.31% and the 5-year and 10-year yields were roughly 1 bp higher at 1.03% and 1.58%, respectively. After a noisy, disappointing jobs report, markets were surprisingly resilient, with Treasury yields only marginally below their pre-release levels.