Don’t Overreact to ‘Noisy’ September Jobs Report

Ivanna Hampton: September’s job gains plowed through Wall Street’s expectations. The Labor Department reported employers added 336,000 jobs last month. That’s almost more than double forecasters’ estimates. Morningstar Research Services U.S. Senior Economist Preston Caldwell has more on what this means for the economy. Thanks for joining me, Preston.

Preston Caldwell: Thanks, Ivanna.

Hampton: So hiring surged last month, and the Labor Department also revised and raised August’s and July’s estimates. What do you make of the job market gains?

Caldwell: It’s important to keep in mind that the job numbers, like any economic indicator, can be very noisy, have a lot of statistical noise. So what we want to avoid is what we see in much of the media, where the narrative lurches from one extreme to another based off of this noisy monthly data. And so what we do is, first off, I look at a three-month moving average. And it is true that on that basis, in the last three months, job gains were 2.1% annualized, which is an uptick compared to the 1.6% growth of the prior three months.

But it’s not a dramatic increase. I would say the data raises the possibility that the prior downtrend in job growth that we saw over the last couple of years has stopped, but it certainly doesn’t foreclose the possibility that that downtrend will renew later on.

Hampton: Now, when Americans are employed, they like to spend. What will it take for the jobs market to weaken enough that it could spark the kind of pullback in consumer spending that will result in a much slower economy?

Caldwell: It’s important to remember that employment is typically a lagging economic indicator. And so usually, we see other developments in the economy happen and then employment responds with a lag. And so right now, one of the biggest factors that’s driving strong consumer spending and the overall level of economic growth is the fact that consumers are just upbeat in their behavior. Despite what they say in the surveys, savings rates are fairly low, which means consumers feel very free to spend. I do think that will change eventually, and when that does, that will weigh on the overall economy by reducing consumption growth, and that will eventually lead to slowing job gains.

Hampton: The Fed is scheduled to announce its rate decision on Nov. 1. It has signaled a “higher for longer” to avoid repeating mistakes of the 1970s, where it cut rates too fast. What will you be watching for to see how committed the Fed is to that “higher for longer” message?

Caldwell: First off, I would say, insofar as job growth remains robust, the Fed obviously isn’t going to cut rates in the next couple of meetings, which nobody expected anyway. On the other hand, I don’t think that the strong job growth that we saw in today’s report is going to induce the Fed to hike again because the inflation data remains quite positive in recent reports. And also, we’ve seen a large runup in bond yields over the last month, which constitutes actually an effective monetary policy tightening.

Now, we do think eventually, in 2024, the Fed will shift to cutting rates because we think by that time inflation will have returned greatly to normal and we will see softening in the broader economic data including the labor market.

Hampton: All right, so something that we should keep our eyes on as we head into the new year. Thanks, Preston, for your time today.

Caldwell: Thanks for having me. Ivanna.