October 31, 2023
The October jobs report should show that the job market remains solid. The economy was growing very rapidly through the end of the third quarter. Weekly new unemployment claims and continuing claims remained low through the month of October. The real question is whether the labor market might be so strong that the Fed decides to continue to maintain high interest rates or whether it can begin to ease back.
Is the Economy at a Non-Inflationary Pace of Wage Growth?
The rate of wage growth has slowed sharply by almost every measure since its peak at the end of 2021 and start of 2022. The annual rate of growth in the average hourly earnings series, using three-month periods, slowed from over 7.0 percent in the fall of 2021 to a 3.4 percent pace in the three months ending in September. The most recent pace is below the average rate of wage growth in 2018-19, when inflation was below the Fed’s 2.0 percent target.
Not all measures of wage growth have shown the same degree of slowing, but the downward direction is unambiguous, even if not all measures show wage growth slowing to a pace consistent with the Fed’s inflation target. The October wage data are likely to be in line with the more moderate wage growth we have been seeing recently, which will still allow for decent real wage growth as long as inflation remains low.
Job and Hour Growth
The 336,000 job growth reported in September was more rapid than almost anyone expected. It is difficult to believe that an economy with below 4.0 percent unemployment can sustain this pace of job growth, so it is likely that we will see a substantially smaller number in October, likely under 200,000.
It will also be important to see the growth in hours. This is both as a measure of labor demand and also an indicator of productivity. We have had very rapid productivity growth over the last two quarters, putting the pace since the start of the pandemic somewhat above the pre-pandemic trend. If this continues then it will mean that we can both see more rapid gains in living standards and also have less reason to fear inflation.
The spread of AI provides some reason to think that we may be seeing an uptick in productivity growth. If AI leads to large-scale displacement of workers in many sectors, that means more rapid productivity growth.
Wage Growth by Sector, Is There Still a Trend Toward Equalization?
One of the most striking features of the pandemic recovery has been the faster pace of wage growth for lower-paid workers. In the establishment data, this showed up most clearly in the rapid wage growth for production and hospitality workers in the low-paid leisure and hospitality sector. Wage growth for this category peaked at over a 20 percent annual rate in the summer of 2021. In the last year, their wages have risen 4.7 percent, and in the three months ending in September, they rose at just a 2.4 percent annual rate. This suggests that we are no longer seeing the trend toward more rapid wage growth at the bottom.
On the other side, manufacturing wages have recently been outpacing the overall average. In the last year, wages for production and non-supervisory workers in the manufacturing sector have risen 5.4 percent. The impact of the CHIPS bill and the IRA may sustain this trend.
Unemployment Moving Back Down
September’s 3.8 percent unemployment rate is low by any historical standard. Still, the rise from a 3.5 percent rate in July is difficult to reconcile with the rapid job growth reported in the establishment survey in the last two months. The monthly data are erratic, and it’s possible the July data understated true unemployment (the unemployment rate was 3.4 percent in April), but we may see some small drift downward in the October report.
Women’s Share of Payroll Employment Continues to Increase
Women’s share of payroll employment had actually crossed 50 percent in the months just before the pandemic. It then fell back to 49.2 percent, as industries that disproportionately employed women, such as hotels and restaurants, had sharp drops in employment. The women’s share has been inching up to over 49.8 percent as these sectors have regained jobs. This trend will likely continue in October.
Continuing Job Growth in Construction and Manufacturing
Even as we have seen strong job growth and GDP growth, recession fears persist, in large part because of the financial stress created by high interest rates. Historically, construction and manufacturing have been the most cyclical sectors in the economy.
It would be difficult to envision a recession where these sectors are still adding jobs. For this reason, job growth in these sectors can be seen as an early warning sign for a recession. It seems likely that modest job growth in both sectors will continue into October.
Labor Force Participation Rates for Prime Age Workers
The prime age (25 to 54) labor force participation rate (LFPR) stood at 83.5 percent in September, 0.4 percentage points above its pre-pandemic peak and the highest level since January of 2007. The women’s LFPR hit an all-time high of 77.8 percent back in June. If the labor market remains strong, we should see some further gains in LFPR.
Black Unemployment Rate Likely to Edge Down
The unemployment rate for Blacks hit a record low of 4.7 percent in April, and then rose back to 6.0 percent in July. It has fallen back down somewhat in the last two months, but stood at 5.7 percent in September. If the labor market is still strong, we should expect some modest decline in October.
Overall Picture: Strong and Sustainable Growth
There is nothing in the economy that would suggest that it has stopped creating jobs at a healthy pace in October. The extraordinary September growth, combined with sharp upward revisions to the prior two-months data revived concerns that the economy was growing at an unsustainable pace.
The third quarter GDP report showed that the economy was growing rapidly, but it also provided evidence that growth was at a sustainable pace. The rate of growth of final demand was 3.5 percent. This is still fast, but much closer to a sustainable pace than the 4.9 percent figure for GDP. Also, inflation by almost every metric continues to slow. It is likely that the October jobs report will fit into this picture of an economy experiencing healthy, sustainable growth.
