US September NFP: More Reasons for the Fed
Non-farm Payrolls in the US are expected to come in above “normal” once again. That would affirm the notion that the US employment situation remains “hot”, and that the Fed can focus on getting inflation down.
The total number of people employed in the US is higher now than it was before the pandemic, suggesting that the jobs market has at least nominally recovered. However, the participation rate, and the share of the population holding down a full time job is less than it was at the start of 2020.
The main drivers
According to the latest BLS report, there were over 10.1M job openings, but just 6.0M people looking for a job. The labor market remains extremely tight, but the gap continues to narrow. The implication is that the labor market is heading towards being balanced, though there is still some time to go. The Fed, therefore, has room to keep raising rates, but that room isn’t unlimited.
Crucially, in August there were 344K jobs created, but the number of open jobs dropped by 1.1M. Meaning that demand destruction is the larger component of the labor market rebalancing. Translated to non-economic speak, that means that more job openings are being closed because businesses are no longer seeking, than because they’ve hired someone.
What it means for the markets
A tight labor market is generally understood to push wages higher, as employers try to attract talent. However, so far this cycle, wage increases have been slower than inflation. Which means that the average real wage has been falling for several months. This could contribute to demand destruction as the average American has less purchasing power. According to the most common economic theory among central bankers and the government, this implies an increased risk of a recession.
In fact, because wages aren’t growing as fast as inflation, this could motivate the Fed to be even more aggressive in tightening. As long as wages aren’t significantly outpacing inflation, then the Fed actually likes labor market tightness, because it supports economic growth, according to them.
What to look out for
September US NFP are forecast at 250K compared to 344K in August. As usual, the prior month could be revised, and also affect market outlook. Since a “normal” NFP is around 200K, any figure above that is likely to support further Fed tightening and weigh on the stock market.
The unemployment rate is expected to remain stable at 3.7%. But, that was also the case last month, when analysts were surprised with an increase in the unemployment rate driven by increased labor force participation. With pocketbooks coming under pressure from inflation, it’s not surprising that more people would be out looking for work, which could once again distort the projections.