Nov 3, 2023 - Economy

Labor market data is catching up with the vibes

Illustration of a grimacing face emoji surrounded by angry market trend arrows.

Illustration: Aïda Amer/Axios

For months, the "vibes" — anecdata, CEO surveys and the like — have pointed to a cooldown underway in the U.S. labor market. The official data, especially on growth in employers' payrolls, has mostly not.

Why it matters: In October, they finally converged. With the new jobs numbers, there's little doubt that the labor market is shifting into a lower gear. That should diminish inflation pressures and make the Fed more confident it is done raising interest rates.

  • It's particularly notable that the evidence of a slowdown was present across all facets of the report — job gains, revisions to previous months, the survey of households, wage growth, the average workweek and more.

By the numbers: Employers added 150,000 jobs, down from a revised 297,000 in September. That number was pulled down by a decline of 33,000 auto manufacturing jobs due to a UAW strike that now appears to be resolved.

  • The unemployment rate ticked up to 3.9%, the highest in 21 months. The rate has now risen half a percentage point from its multi-decade low of 3.4% earlier this year.
  • A broader measure of unemployment that counts people working part-time who want full-time work, and those who have given up looking for a job out of frustration, rose to 7.2% from 7% in September, and 6.5% at the end of last year.
  • Revisions to August's and September's numbers reduced those counts by a combined 101,000, suggesting job creation in late summer was not as rip-roaring as earlier estimated.

What they're saying: "All of the key indicators … suggest that the economy is cooling and the labor market is slackening," wrote Julia Pollak, chief economist at ZipRecruiter, in a note.

  • "The decline in these topline indicators partly explains why job seekers and new hires are feeling more stressed out than they have in over a year," she wrote.
  • "The decline in real disposable income last month suggests that consumer spending could cool further in the coming months, putting yet more downward pressure on the labor market."

Of note: If the jobless rate rises just another couple of ticks and stays elevated, it will invoke the Sahm Rule, a useful rule-of-thumb indicator that a recession is underway.

  • When the three-month average of the jobless rate is 0.5 percentage point above its recent low, it has been a clear-cut recession signal in the past. That indicator now stands at 0.33.

The numbers add up to a sweet spot for the Fed. If data like this keeps coming in, the central bank will likely be done with interest rate increases.

The big picture: The numbers all point to the labor market remaining strong by most historical standards yet not in a zone that would necessarily fuel inflation.

  • Average hourly earnings rose a mere 0.2% and were up 4.1% over the last 12 months — the lowest since May of 2021. Over the last three months, earnings have risen at a 3.2% annual rate, well within the range consistent with the Fed's 2% inflation target.

State of play: Financial markets reacted to the jobs report accordingly, with two-year Treasury yields plunging as traders priced in lower odds of further rate hikes and higher odds of rate cuts in 2024.

  • The 10-year yield plunged even more, to 4.54% in early trading, continuing a reversal of the rates surge that had pushed that rate to 5% last month.

Yes, but: In a less welcome turn of events for the Fed, the labor force shrunk 201,000. Fed chair Jerome Powell emphasized this week that an expanding labor force created supply-side improvement that was helping keep inflation in check despite strong growth.

  • One month's move could be statistical noise, but for October at least, it went in the wrong direction.
  • "We think policymakers will be paying close attention to the supply-side aspects of next month's report in order to help determine whether supply side expansion will continue to be a disinflationary driver," wrote Tiffany Wilding, an economist at Pimco, in a note.

The bottom line: The vibes were right, and the earlier data was wrong. This is a job market that has lost steam — with the open question being whether there is significantly more damage yet to come.

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