US Labor Market Shows Resilience Despite Global Uncertainties

The US labor market defied expectations with a robust performance in September, potentially easing pressure on the Federal Reserve to aggressively cut interest rates. Despite geopolitical headwinds and concerns about a slowing global economy, US employers added a surprising number of jobs, suggesting continued resilience in the face of rising interest rates. This unexpected strength, however, comes with a note of caution as some analysts question the sustainability of this growth amid signs of weakness in other economic indicators.

A key highlight of the September jobs report was the unexpected surge in nonfarm payrolls, which jumped by 254,000, significantly exceeding economist forecasts. This marks the most substantial increase since March and comes on the heels of five consecutive months of downward revisions in payroll figures. The report's positive news was further bolstered by upward revisions to job gains in previous months, painting a picture of a more robust labor market than previously perceived.

However, the surprisingly low response rate to the Bureau of Labor Statistics' survey, which informs the monthly jobs report, injects a degree of uncertainty into these figures, potentially signaling a downward revision in the coming months.

Mixed Signals: Hours Worked Decline Despite Strong Hiring

Drilling down into the details of the report reveals a mixed bag. While the headline payroll number and upward revisions provide a reason for optimism, other data points suggest some underlying weaknesses in the labor market.

Notably, the unemployment rate did tick down to 4.1%, reaching a new low, and the labor force participation rate remained steady. However, aggregate hours worked actually declined 0.1% month-over-month in September, a surprising divergence from previous months where strong payroll growth was accompanied by an increase in hours worked.

This discrepancy raises questions about the sustainability of the current pace of hiring and whether businesses might be adjusting to softening demand by reducing hours rather than outright layoffs. This is especially concerning given that in March, when payrolls were similarly strong, aggregate hours rose 0.4%.

Wage Growth Picks Up, But Inflation Concerns Linger

Adding to the complexity of the picture, wage growth, a key indicator for inflation, showed signs of picking up slightly. Average hourly earnings increased by 4% year-over-year, the highest level since May. While encouraging for workers, this uptick could potentially reignite concerns about a wage-price spiral, where rising wages contribute to higher prices for goods and services, fueling further inflation.

However, some economists argue that with productivity gains remaining strong, businesses may be able to absorb these wage increases without necessarily passing them on to consumers in the form of higher prices.

It's worth noting that average hourly earnings for production and non-supervisory employees ticked down a tenth to 3.9%, matching the recent July low. Moreover, strong productivity gains in Q2 brought unit labor cost growth all the way down to 0.4% y/y, which is unsustainably low, so a modest increase from here would make sense.

Strong Labor Market Points to More Gradual Rate Cuts

Beyond the immediate data points, the bigger question remains whether this robust performance in the labor market can be sustained amidst growing economic headwinds.

While the September jobs report provides some reassurance to policymakers and investors, the Federal Reserve will likely remain cautious in its approach to interest rate cuts.

The unexpectedly strong job growth, coupled with upward revisions to gross domestic income and a higher savings rate, suggests that the US economy might have more resilience than anticipated. This could give the Fed some breathing room and allow it to proceed with smaller, more gradual interest rate cuts in the coming months, as it seeks to balance the need to tame inflation with supporting economic growth. The upward revisions to gross domestic income that lifted the savings rate estimate markedly, from 2.9% to 4.8%, also supports this notion.