U.S. Outlook: Payrolls report doesn’t provide a clear picture
Are we in a mid-cycle slowdown or at the start of a more serious downturn? Investors were looking to the September U.S. payrolls report for clarity after sobering September ISM manufacturing and non-manufacturing PMI surveys. Unfortunately, the September employment report sent a muddled message. It has a little good news and some bad news on the U.S. labor market.
In my view, there are clear signs of a cooling labor market in September’s jobs numbers. However, I see no signs yet of the panic and capitulation typical at the onset of a recession. With that said it is also too early to sound the all-clear. We continue to forecast even slower GDP and employment growth ahead and remain on recession watch for 2020.
September job growth came in on the light side. There were 136k jobs created last month less than the consensus forecast looking for 145k jobs, while private-sector jobs growth slipped to 114k from 122k in August.Bad News for Consumers
Average hourly earnings growth also undershot forecasts. There was no average hourly earnings growth in September from August and only 2.9% average hourly earnings growth from a year ago. This was the lowest monthly average hourly earnings growth since October 2017 and the lowest on an annual basis since July 2018.
Deteriorating earnings growth is bad news for future consumer spending growth and in-line with our forecast that the consumer will be providing less support for the economy in the quarters ahead. Real consumer spending growth is expected to move below 2.0% in 2020.
We saw job loss in the manufacturing sector for the first time since March (-2k). Job losses in the retail sector accelerated to 11k jobs last month. The retail sector has lost jobs now for eight consecutive months with no end in sight. Job growth decelerated in September in many other service sectors, including financial services, business services, temporary help, education, healthcare, and government.Unexpected Drop in Unemployment Rate
So where is the good news, you ask? The good news is that investors were bracing for worse. We got an upward revision of 45k jobs for July and August. The U.S. unemployment rate also unexpectedly dropped to 3.5% from 3.7% in August. The unemployment rate is calculated from a household survey on employment rather than an establishment survey. It showed a brighter jobs picture of 391k jobs created in September with a coincident drop of 275k unemployed persons.
This data is highly volatile month-to-month based on survey responses from households rather than businesses and is considered somewhat less reliable than the establishment survey. In short, economists and investors focus more on the establishment survey for divining the direction of economic growth.
We think today’s better than expected unemployment rate reading probably exaggerates the current strength of the labor market. We look at the labor force participation rate, which held steady last month at 63.2% as a better measure at this point. Nevertheless, further declines in the unemployment rate are unlikely in the months ahead. We are forecasting a gradual increase in the U.S. unemployment rate in the months and quarters ahead.
Click here to download my U.S. Outlook, delivered on October 4.