The Jobs Market Has Found Its Sweet Spot — For Now

The Bureau of Labor Statistics shows in Friday’s data, a labor market that is growing at a modest, stable pace.

In general, job and wage growth have moderated to a point, where they do not exert inflationary pressures. This could create the policy space for the Federal Reserve to proceed cautiously with further interest rate hikes, so as not to create unnecessary economic pain.

The economy added 263,000 jobs in September 2022.

This is the second month in a row that job growth has declined, down from 315,000 jobs in August and 537,000 jobs in July.

On average, the economy added 360,000 new jobs each month during the past six month, compared to 588,000 jobs in the six months before that. Job growth still remains positive, but at more moderate levels than was the case just a little while ago.

The fact that job growth has remained positive was not given. The economy after all has faced massive headwinds from the war in Ukraine, continued supply chain disruptions from the ongoing Covid pandemic and aggressive monetary tightening by the Federal Reserve.

The economy has slowed from its red hot pace of the previous year to a more manageable one, while still avoiding a recession and thus highlighting the underlying strength of the economy.

Job Growth by Industry

Additional details by industry further underscore the persistent strength of the economy. Jobs in manufacturing and construction – two industries that are notoriously sensitive to macroeconomic changes – are still growing.

Manufacturing overall added 22,000 jobs in August and manufacturing of durable goods, which includes cars and other items that are often sensitive to higher interest rates, increased by 16,000 new jobs that month.

Construction added another 19,000 jobs last month, with the bulk occurring in commercial construction. This suggests that businesses continue to expand their investments in another positive sign for continued positive economic growth.

While the economy so far has avoided a recession, other data highlights the ongoing slowdown towards a stable, sustainable pace.

Main Findings Of September’s Jobs Report

Job growth is now largely in line with population growth as the employed share of the population, stayed steady at 60.1% in September 2022.

And, wage growth for production, nonsupervisory workers – the vast majority of workers — has fallen to an annualized rate of 4.3%, down from 8.6% at the end of 2021. As wage growth moderates close to 4%, it falls to levels that are consistent with the Federal Reserve’s target inflation of 2% percent. After all, the target wage growth is the sum of desired inflation – 2% – and long-term average productivity growth – also at roughly 2%.

Moreover, the unemployment rate fell to 3.5% because people left the labor market rather than a massive hiring spree. This is yet another sign that economic and job growth are softening.

In line with that, there are some indications that companies are able to manage their labor force better than in the past, without massive wage and benefit increases. Average hours went up after dropping the month before. Put differently, businesses hoarded labor in August and then expanded hours for their existing workforce in September when conditions warranted that.

Also, the number of people working part-time due to economic reasons dropped substantially by 306,000 in September, with most people likely finding full-time employment during that month. Employers expanded work for existing workers rather than trying to lure a lot of new employees with higher wages and additional benefits.

All of these indicators reflect a labor market that has reached a stable, sustainable pace in line with fewer inflationary pressures. This slowdown in turn, could give the Federal Reserve some room to tread more cautiously.

The labor market now hangs in the balance. It appears to have reached a comfortable point of modest job growth and manageable wage increases. It still faces massive economic risks that could quickly push the economy into a recession.

Policymakers at the Federal Reserve and in Congress will need to pay close attention, tread cautiously and provide assistance to avoid the massive economic pain to society’s most vulnerable that a recession entails.