US payrolls report comes in hot

But one-off factors have likely boosted today's reading, while the modest fall in wages growth will be welcomed

By Stuart Cole | @Stuart Cole | 6 October 2023


It was a hot payrolls report from the US today, the headline number printing at 336k, nearly double the expected reading of 170k. And a substantial 119k upwards revision to the previous two months numbers was also delivered, ending a trend seen this year of revisions being generally to the downside. As would be expected, the numbers have raised market expectations of the Fed hiking rates at least once more before year end, seeing stocks and bonds fall in the process and driving yields higher. The key 10-yr Treasury yield gained almost 14bps at one point before slipping back slightly to trade around the 4.82 area the time of writing. But it is not all one way, as the small uptick in the unemployment rate and slightly softer earnings numbers suggest some signs of labour market softening. But their impact will be swamped by the headline number, even though it is wages that ultimately drive costs and inflation.

However, drill down into the report and the picture being painted is not quite so strong as on first glance it appears to be. The increase in private sector jobs is mainly focused on the services sector, which rose by 234k, a much larger increase than the average reading of 107k seen over the previous quarter, one number in itself not being enough to suggest that hiring intentions have structurally stepped up. Further, the hiring intentions index contained in the regular business survey carried out by the National Federation of Independent Businesses had been suggesting that services sector hiring over the past few months was a little stronger than the BLS figures were suggesting. Today the BLS number has come in above the NFIB reading, which suggests that the true picture is somewhere between 107k and 234k.

It also needs to be borne in mind that the size of the US labour force has increased by just under 300k people over the past year, mainly the result of faster population growth (particularly immigration). If that pace of expansion continues – and there are no signs yet to suggest that it will not – then today’s marginally stronger than expected unemployment rate can be expected to continue moving upwards, which will in turn put further downwards pressure on the ‘Quits’ rate and, by implication, wages growth: ultimately it is wages growth that drives costs and inflation in the services sector, and at the end of the day it is inflation that the Fed is mainly concerned about, not the payrolls number per se. Therefore, as long as wages growth and inflation continue to slow, then the Fed should not be unduly concerned by strong jobs numbers in themselves.

The problem, however, is that the Fed is in the middle of a credibility re-building exercise and if the market thinks that payrolls strength justifies the need for further interest rate rises then, at the margin, that may be enough to tip the FOMC’s hand. But FOMC policy is already tight, and as this financial noose continues to tighten, simply having more people in work, but on falling real wages, does not necessarily boost aggregate consumption, nor does it mean people are more able to meet rising repayments on their mortgages and loans, credit cards etc. And higher interest rates will simply see the cost of borrowing for US corporates also rise further, denting even more already falling capital expenditure plans, seeing employment and inventory levels cut back and potentially forcing some businesses to close altogether.

The modest fall seen today in the average hourly earnings reading, from 4.3% to 4.2%, is unlikely in itself to be enough to convince the Fed that wages are slowing sufficiently to offset the increase in the payrolls number. As of today, therefore, another increase in the cost of borrowing is looking likely. Of key importance, therefore, will be the release of the Employment Cost Index on October 31st, the Fed’s preferred measure of wages growth. If this also confirms that wages growth is slowing, then it could just be enough to prevent the FOMC from pulling the interest rate trigger again on 1st November.