As I have been saying for some time, the best indicator for the economy as a whole is the jobs market. With consumer spending representing more than two-thirds of the economy, as long as people are working, they can spend. And the jobs numbers tell us whether they are working.
A Look Under the Hood
This morning’s report shows that yes, more and more people are working. According to the business survey, the total number of jobs was up by 261,000, down from recent highs but still a strong number historically. Looking under the hood, prior months were revised up by 29,000, private payrolls were up by 233,000, and manufacturing jobs were up by 32,000. All of these numbers substantially beat expectations. The job market is still very, very healthy.
Arguably, there were some weaknesses here as well. Both the unemployment (U-3) and underemployment (U-6) numbers were up, from 3.5 to 3.7 percent and 6.7 to 6.8 percent, respectively. I say “arguably” because these numbers reference a different survey, the household survey, which showed that employment declined by 328,000. This survey is typically more variable, due to the survey structure, but it is something we should be aware of. The headline numbers may be weaker than they look.
The Big Picture
But, looking at other data, I don’t think so. Hours worked stayed stable, even as jobs grew, signaling increased overall labor demand. Available job openings actually increased by 700,000, reversing part of a recent decline and staying well above pre-pandemic levels. Voluntary quit rates pulled back a bit but again remain well above pre-pandemic levels. And, most relevant to the Fed, wage growth also remained high, although down a bit over previous months. All of the supporting data was consistent with the business survey, not the household survey.
The big picture here is of a normalizing labor market, one where hiring is slowly trending down but remains at very healthy levels. Given the job openings levels, it is likely that part of the slowdown in hiring is due to a shortage of labor—there simply are not enough candidates—rather than a lack of demand.
What It Means for the Economy and Markets
So, what does this mean for the economy and markets? The Fed will welcome the slowdown in job and wage growth, but they still likely remain too high to contain inflation. So, expect continued tight policy in the short run. As long as job growth stays healthy, so will demand growth and so will inflation. But the slowing trend is good news and suggests we might be back to something like normal in the next six months or so, which could lead to a Fed pause.
The momentum in job growth will also support overall growth. While higher rates have clearly hit major sections of the economy, such as housing, more jobs mean spending power will continue to grow and provide a cushion for that damage. If we do get a recession, and that is not certain, it should be a mild one as long as job growth stays at levels such as we saw last month.
It is also good news for markets. Analysts have been decreasing earnings estimates on an assumed recession. But, as noted, those assumptions may be too pessimistic. The initial market reactions seem to support that.
Overall, two cheers for this jobs report. There is enough growth to keep the economy and earnings going, but enough slowing that the Fed and markets can plausibly see a pause sometime in the next six months or so. This isn’t a perfect Goldilocks report, not too hot and not too cold, but it is as close as we were going to get.