Is labor loose or simply softer?

Key takeaways

• Unemployment rose, but it might be too early to sound the alarm
• We’re keeping an eye on the pace of hiring to monitor where labor goes next

Since the Fed started hiking there was a banking mini crisis, an Olympics, and Taylor Swift dropped two new albums (with just as many rereleases). The Fed has now cut after citing progress on inflation amidst potentially worrisome softer labor conditions. With the S&P 500 near all-time highs, is the labor situation just champagne problems or is it over now?

In a vacuum, the labor market looks relatively strong. Unemployment was a mere 4.1% in September, layoffs remain at lows, and nonfarm jobs grew for over 40 consecutive months, according to data from the St. Louis Fed’s “FRED”. The September jobs report posted a positive surprise, though hiring could be weak in the near-term from exogenous shocks like Hurricane Helene. However rosy this picture may seem, it’s weaker than it recently has been.

Markets and the Fed are focused on the direction that labor is heading tomorrow rather than how metrics are reading today. The unemployment rate has been making a leisurely stroll upwards. Nonfarm payroll growth has also been trending weaker. Payrolls continue to grow each month, except at a slowing pace.

Sluggish job growth and creeping unemployment sound nightmarishly familiar for many investors; however, bearish labor market deterioration is typically quick and painful. Ongoing shifts in the data could be described as anything but. Current softening labor conditions more closely resemble normalization than a recessionary shock.

The economy is not experiencing the infamous job loss that is integral to recessions. The Bureau of Labor Statistics (BLS) measure of the layoff rate for September was 1%, which is the same value that it started the year at. The BLS measure of job losers, caused by both temporary work as well as layoffs, is similarly low. This is antithetical to a recessionary shock.

Labor markets were abnormally tight as companies rapidly hired in the wake of the pandemic. Job growth was strong, but labor demand outpacing supply can have overheating effects.

A slow and steady rise in unemployment could be more of a pressure release than warning sign. Slower hiring could be reflective that the prior rate was unsustainable – headcount expansion needed to cool after a breakneck hiring spree and near full employment.

A common callout is that rising unemployment is largely due to an expanding labor force. Immigration added new workers faster than the economy added jobs, as discussed to by Fed Chair Powell. Adding more workers is potentially bullish considering that the US economy has notoriously had a labor shortage in recent years. We think rising unemployment is showing the effects of more people looking for work rather than the worse alternative of more people being put out of work.

To prevent a further increase in the unemployment rate, jobs would need to be added fast enough to combat labor force expansion. The San Francisco Fed estimates that the short-run breakeven rate is about 130,000 jobs added per month. Over 250,000 nonfarm payrolls were added in September, and the 3-month rolling average is 186,000. The trend of rising unemployment in 2024 has cooled off.

Something that we don’t expect is that workers looking for a job will be easily absorbed by the over 7 million job openings reported by the BLS. Jobs being “cross posted” – posting the same roll in several cities on several platforms – increased during the pandemic as an implication of the rise in remote work. Cross posting could have potentially led to some double counting and affect the accuracy of tallying openings.

We are hesitant to rely on this datapoint due to the risk of overcounting. If there were an historically unprecedented 7-8 million job openings, we would expect such enormous labor demand to bid up wages at a faster rate than we are currently seeing.

We gain confidence that there has been a breadth of job openings from other metrics and can look to items such as payroll growth to help us more reliably gauge labor demand. My team finds assurance in figures like the prime age employment to population ratio: over 80% of the prime age population is working. Working age adults are finding jobs and working at a rate unseen since 2001.

The employment-population ratio indicates we haven’t had a labor shock yet, and hiring near the breakeven rate suggests that one isn’t underway. This makes my team have pause on declaring the uptick in unemployment a bearish signal. We continue to monitor initial jobless claims and layoffs, which aren’t abnormal or particularly worrisome right now, so that we can react if labor eventually starts to rollover.

Zooming out to get a more holistic view of the economy, macroeconomic indicators are bullish. The Atlanta Fed’s GDPNow has recently been estimating around 3% real GDP growth. This hasn’t come at the expense of overheating prices. CPI and PCE, reading 2.4% and 2.2% as of October 10 on FRED, are in striking distance of the Fed’s 2% inflation target.

My team is generally optimistic heading into the fourth quarter. We’re keeping an eye on the data to confirm that this is indeed a normalization but are prepared to readjust if the tides start to change. For now, it looks like we’re out of the woods and this won’t turn out to be a cruel summer after all.

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