A large increase in nonfarm payrolls for September is unfavorable news, correct? For CFOs, it could heighten their already most-pressing concerns, cited in the recent Duke/Richmond Fed CFO Survey: monetary policy, labor quality and availability, and cost pressures (inflation).
An even tighter job market than expected could push up wage bills for 2024. Inflation in the 3% range and higher could stick around for longer or even worsen as labor demand outstrips supply. As a result, the Federal Open Market Committee (FOMC) may have to keep the Fed funds rate in its current range or higher for a more extended period. It also boosts the argument for another 25-basis-point interest rate increase by the FOMC at its November or December meetings.
But there are reasons to be more optimistic. Yes, the jobs market is still very robust. Total nonfarm payroll employment rose by 336,000 in September, above the average monthly gain of 267,000 over the prior 12 months, the Bureau of Labor Statistics (BLS) said on Friday. In addition, nonfarm payroll adds were revised upward for the previous two months by a combined 119,000.
But another piece of data released on Friday tempers the idea (at least according to some economists) that we’ll see worker pay surge again from a tight market: slowing wage growth numbers, which have decelerated on a nominal basis in recent months.
“While [year-over-year] wage growth ticked down to 4.2%, the annualized three-month change dropped significantly to 3.4%,” tweeted the Economic Policy Institute’s Elise Gould. Average hourly earnings growth peaked at 5.9% in March 2022. Finance executives in The CFO Survey projected their wage bills would grow 4% at the median in 2024.
“Why applaud decelerating nominal wage growth?” Gould asked in another tweet. “1. The Fed will be looking at that closely to determine whether there's overheating that may spur their rate hikes further. 2. Real (inflation-adjusted) wages are rising because inflation has fallen much faster than wage growth.”
The Bank of America (BofA) Securities economics research team noted “the moderation in wages over the last two months suggests that the balance between demand and supply has improved.”
Supply Not Demand
Job gains were not broad-based when looked at by industry. Gains mostly occurred in leisure and hospitality; government; health care; professional, scientific, and technical services; and social assistance.
“The sectors that lagged behind the broader labor market recovery continue to hire at a rapid clip,” according to BofA Securities economists. Some of these sectors have only just returned to pre-pandemic levels, suggesting payroll adds were businesses filling in jobs left open due to a low worker supply.
Moody’s Investors Service chief economist Market Zandi tweeted:
The more I dig into the Sept jobs report, the more I like it. The job market is strong, but not too strong to forestall lower inflation. All signs suggest the economy is at full-employment, not beyond, and labor supply is keeping up with labor demand. Couldn’t be much better.— Mark Zandi (@Markzandi) October 6, 2023
Harvard economist Jason Furman also took solace in the wage data: “When [the payrolls data] is combined with the higher labor force participation [and] slowing wage growth I would say the balance of evidence is that this is supply not demand. So letting myself enjoy this one,” he tweeted.
Another positive: by the end of Friday, Fed funds futures were projecting only a 31% probability of a Fed rate hike in November and a 36% chance of one in December. The probabilities increased only a few percentage points by the end of Friday.
"The labor market will not cool with job growth continuing at this rapid pace."
Bruce Coulton, Chief Economist, Fitch Ratings
That’s not to say CFOs should stand pat with their current economic forecasts.
As Brian Coulton, chief economist at Fitch Ratings, stated in an email, "This strong jobs number, allied with the rise in job openings in August and recent upward revisions to estimates of the cushion of excess household savings, point to upside risks to the near-term U.S. economic outlook. The labor market will not cool with job growth continuing at this rapid pace. This will keep upward pressure on wages.”
Stifel Chief Economist Lindsey Piegza said the surge in hiring “perpetuates the notion of higher for – even – longer.” The unemployment rate “continues to bounce below the Fed’s full employment range, with inflation showing less improvement than previously anticipated relative to earlier forecasts,” she said in an email. “It’s clear the [FOMC] still has more work to do.