Labor Market Beats Expectations Without a Reacceleration in Wage Growth

Key Takeaways:

• Nonfarm payroll employment rose by 336,000 in September, the strongest month of job gains since January, according to the Bureau of Labor Statistics (BLS). In addition, the prior two months were revised upward by a combined 119,000 jobs. Employment gains were broad-based across industries with leisure and hospitality and government employment reporting the largest gains with 96,000 and 73,000, respectively. The unemployment rate and labor force participation rate were unchanged at 3.8 percent and 62.8 percent, respectively, as the household employment survey showed weaker job growth of 86,000. Average hourly earnings increased 0.2 percent for the second consecutive month, providing additional evidence of slowing wage gains. Earnings were up 4.2 percent from a year ago, a deceleration of one-tenth compared to August.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings jumped by 690,000 to 9.6 million in August, only the second monthly increase in job openings in 2023, according to the BLS. Other data were cooler, with the quits rate flat at 2.3 percent.
• The ISM Manufacturing Index increased by 1.4 points to 49.0 in September, still in modest contractionary territory but the highest level since November 2022. The new orders index and the production index rose by 2.4 points and 2.5 points to 49.2 and 52.5, respectively. The non-seasonally adjusted prices paid index fell 4.6 points to 43.8, reversing much of last month’s unexpected increase.
• The ISM Services Index declined 0.9 points to 53.6 in September. The new orders index fell sharply by 5.7 points but remained in expansion at 51.8. The business activity index was up 1.5 points to 58.8. The prices paid index was flat at 58.9, a level just above the 2019 average.
• Light vehicle sales increased 1.6 percent to a seasonally adjusted annualized rate of 15.7 million in September and were revised upward modestly in August, according to Autodata. The sales rate remains around 1.5 million annualized units below its typical 2019 level and roughly half a million below its recent summer peak.
• Factory orders rose 1.2 percent in August following a 2.1 percent decline in July, according to the Census Bureau. Durable goods orders increased 0.1 percent, while orders for nondurable goods were up 2.1 percent, their third consecutive monthly increase.
• The real goods U.S. trade deficit narrowed by $4.5 billion to $83.9 billion in August, according to the Census Bureau. Real exports were up 0.1 percent, while real imports declined 1.9 percent.
• Private residential construction spending increased 0.6 percent in August, the fourth consecutive monthly gain, according to the Census Bureau. Spending on single-family construction rose 1.7 percent, while multifamily construction spending rose 0.6 percent. Spending on improvements declined 0.7 percent.

Forecast Impact:

Job gains were nearly double our expectations in September, contradicting our forecast that payroll gains would continue to weaken through the end of the year as economic growth slowed. Instead, both the broad-based nature of job gains across industries and the unexpected uptick in job openings in the August JOLTS report suggest that the labor market may be regaining steam after a summer slowdown. However, wage growth did not accelerate and remained at a level that would likely be consistent with 2 percent inflation for the second consecutive month. Further, the JOLTS quits rate, which is useful in forecasting future wage gains, held at 2.3 percent, the same level as in 2019, and the household survey was weaker than the establishment that measures topline job gains. The unemployment rate, therefore, remained at 3.8 percent. All told, in our view, the robust job growth combined with modest wage growth is good news for the prospects of a “soft landing,” but it’s unclear whether such large employment gains can be sustained with lower wage growth. Further, this jobs report is not affected by the significant increase in long-term interest rates over the past month, which will likely act to slow the economy and the labor market moving forward.

The increase in the ISM manufacturing index suggests that industry may be closer to stagnation than significant contraction, though it is still consistent with our forecast for a slowing in the underlying growth trend. The decline in the services index is also consistent with that forecast, especially with the significant decline in the more forward-looking new orders component.

While we continue to expect a substantial slowdown in economic growth in Q4, the significant decline in the real trade deficit will cause an upward revision to our third quarter growth estimate. Still, the mix of declining imports and strengthening of the U.S. dollar due to the recent rise in long-term interest rates suggest both that future consumption growth is likely to be weaker and that future export strength is unlikely.

Nathaniel Drake
Economic and Strategic Research Group
October 6, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.