September: very much a “soft landing” jobs report. But will the Fed use this to fall behind the curve again?

 

 - by New Deal democrat



Especially in view of the relative weakness in the jobs report for the past few months, my focus continues to be on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether there is further decline towards a recession. 

For this month at least, the verdict was clear: both the Establishment and Household Surveys pointed to “soft landing.”

Below is my in depth synopsis.

HEADLINES:

• 254,000 jobs added. Private sector jobs increased 223,000. Government jobs increased by 31,000. 
• For a change, there were *upward* revisions to the last two months. July was revised upward by 55,000, and August by 17,000, for a net increase of 72,000. This breaks with the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 430,000 jobs. On a YoY basis, this series has only risen by 314,000 jobs, which remains consistent with recession, as it has for months. On the other hand, it is an improvement from last month, where there was an actual YoY decline.
• The U3 unemployment rate declined -0.1% for the second month in a row, to 4.1%, which also means the “Sahm rule” recession indicator, for the first time in three months, is no longer in effect.
• The U6 underemployment rate fell -0.2% to 7.7%, still 1.3% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose another 60,000 to 5.97 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. This month they were mixed:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators,  was unchanged at 40.7 hours. This remains down -0.8 hours from its February 2022 peak of 41.5 hours, but on the other hand is only 0.1 hour below its 18 month high.

• Manufacturing jobs declined -7,000.
• Within that sector, motor vehicle manufacturing jobs declined -6,500. 
• Truck driving declilned -700.
• Construction jobs increased 25,000.
• Residential construction jobs, which are even more leading, rose by 2,000 to another new post-pandemic high.
• Goods producing jobs as a whole rose 21,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -13,800, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer declined -322,000 to 2,146,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.08, or +0.3%, to $30.33, for a YoY gain of +3.9%. This continues the trend of deceleration from their post pandemic peak of 7.0% in March 2022, and was less than 0.1% higher than its post-pandemic low set in July. Most importantly, though, this continues to be significantly higher than the 2.6% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.2%, and is up 1.2% YoY, in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was rose 0.4%, and is up 5.2% YoY. These have been slowly decelerating since the end of the pandemic lockdowns, and that trend continued this month, which was tied for the post-pandemic low. Nevertheless, with the latest YoY consumer inflation reading of 2.6%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment rose 17,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.5% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions. On the other hand, there has been no meaningful further YoY deterioration in the past 12 months.
• The employment population ratio rose 0.2% to  60.2%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate also remained steady at 62.7%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declined -0.1% to 83.8%, vs. 84.0% in July, which was the highest rate during the entire history of this series except for the late 1990s tech boom.

SUMMARY

Last month I wrote that “Along with the big downward revisions to the last several months, this month’s report is the first time that there is substantial evidence that the jobs market may have moved past a ‘soft landing’ into a hard slowdown that could easily tip over into outright declines by the end of the year.” 

This month’s report completely reversed that. Not only were the headline numbers all good, but there were positive revisions to the past several months. Average middle and working class workers continue to see good wage and hourly increases in pay, with real inflation-adjusted increases to buying power. And the headline Household survey employment number joined in the good news for a change.

Not everything was rosy. To reiterate what I wrote last month, “manufacturing seems at long last to have rolled over,” with the third decline in four months. The sector has shed -0.4% of its total so far this year. Trucking continues to slowly shed jobs as well. This isn’t recessionary compared with the last 30 years, but it is weak. At the further edge of the spectrum, those who haven’t looked actively but want a job now increased close to a 24 month high.

But the construction sector continues to do well, including - surprisingly - residential construction jobs, despite the downturn in housing construction metrics. Short duration unemployment declined, mirroring the recent downturn in initial claims.

To reiterate my opening statement, for this month at least the “soft landing” scenario is fully intact. If there is a concern, it is that the Fed, which has been behind the ball for about 3 years, will take this as a sign that it can maintain high interest rates, despite the fact that it has to make policy for the jobs sector one year from now, not for last month.