Stagflation hits labor market in September
Job gains miss while wages soar.
September nonfarm payrolls suffered their smallest gain of the year, rising by a much weaker-than-expected 194,000 jobs. The Bloomberg consensus was for a solid gain of 500,000 jobs, and our forecast here at Federated Hermes was for a larger increase of 543,000.
But the Labor Department did revise July and August results higher by a combined 169,000 jobs, which bridged more than half of this morning’s nominal jobs miss. In addition, for the seventh time in the last eight months, it also seasonally adjusted the September nonfarm payroll report down by 460,000 jobs, from a nominal gain of 654,000 jobs to a seasonally adjusted gain this morning of only 194,000 jobs. Over the past 20 years, the average seasonal adjustment for September has been a decline of 487,000 jobs.
Wage inflation continues to soar Average hourly earnings rose by a much stronger-than-expected 0.6% in September on a month-over-month (m/m) basis, which puts their annualized gain at a 6% pace over the past six months. Historically, when average hourly earnings have approached or exceeded the 4% level, policy responses were quickly implemented to cool an overheated economy and attempt to avert a subsequent rollover into recession. Moreover, average weekly hours worked rose to four-month high of 34.8 in September.
Stagflation fears? All of this points to growing labor-market stagflation, as weaker-than-expected job creation over the past two months has combined with what appears to be soaring and sustainable wage inflation. This damaging combination is reminiscent of the Carter Administration’s fiscal policy woes in the late 1970’s and the Federal Reserve’s subsequent Volker-esque policy response to break the back of inflation.
Fed stays on schedule to taper soon Despite today’s payroll miss, we continue to expect the Fed to announce the beginning of its Quantitative Easing (QE) tapering program at its upcoming FOMC meeting on Nov. 2-3, 2021. We still expect a tapering pace of $15 billion monthly ($10 billion in Treasuries and $5 billion in mortgage-backed securities), suggesting that the Fed’s $120 billion in monthly purchases could approach zero by June 2022. We also still expect the Fed’s first interest-rate hike towards the end of calendar 2022, with several more hikes coming during 2023.
Unemployment and participation rates fall The household survey climbed by a solid 526,000 jobs in September, and the number of people unemployed plunged by 710,000. As a result, the official unemployment rate (U-3) plummeted to a cycle low of 4.8% last month from 5.2% in August; similar story for the labor impairment rate (U-6), which dropped to 8.5% last month from 8.8% in August. But 183,000 people dropped out of the labor force last month, which drove the participation rate down a tick to a three-month low of 61.6% in September.
Sector detail tells the tale The manufacturing sector added a solid 26,000 jobs in September, and construction hired 22,000 workers, its best showing in six months. Retail hiring reversed two months of job losses, adding 56,000 workers in September, as the industry girds for Christmas. Leisure & hospitality doubled its monthly hiring pace in September with 74,000 new workers, as the economy continues to reopen.
But local government education hiring plunged by 144,000, as vaccine mandates for teachers and other school employees caused significant dislocation as schools were attempting to reopen in person last month.
The Delta variant peaked and rolled over in 80% of states and the 85% decline in vaccination rates since April has stabilized. With schools and child-care facilities reopening and with the end of the $300 weekly Federal unemployment bonus more than a month ago, we expect hiring to improve in these sectors.
JOLTS strong, ADP rebounds, noisy claims recovering The Job Openings & Labor Turnover Survey (JOLTS) posted a much stronger-than-expected record high of nearly 11 million job openings in July, and the number of people who voluntarily quit their jobs rose to a record 4 million, with a record quits rate of 2.7%, as the “Great Resignation” continues. With little hyperbole, it seems every business in America is hanging a “Help Wanted” sign in the window.
September’s ADP report added the most jobs in three months, with a much stronger-than-expected gain of 568,000 private jobs, compared with 340,000 jobs in August.
Last week, initial weekly jobless claims fell to a much lower-than-expected, four-week low of only 326,000 claims. But September’s employment survey week had popped by 12.5% over the previous two-week period to 351,000 claims, a disappointing level comparable to August’s survey-week claims (349,000). California was double-counting unemployment claims in recent weeks due to an administrative quirk, but their problem appears to be fixed. So we expect the powerful downward trend in national claims, which have already plunged by 95% from their March 2020 peak, to resume.