Data Flashes - US

The Bottom Line: 

This morning’s employment report is adding more confusion than clarity to an exceedingly foggy backdrop. The nonfarm payroll report came in well-above consensus in September (+119K vs. 51K consensus), on the back of weak summer hiring that saw payrolls decline in June and August. Despite the favorable upside to payrolls, the unemployment rate worryingly ticked higher (to 4.4% from 4.3% the prior month), and this will add to the dovish views within the Fed as it is reflective of further weakening in the labor market. 

While the data is stale, it gives us an idea of the starting point ahead of the government shutdown. But the Fed will not get another employment report from the BLS ahead of the December meeting. Pairing this morning’s mixed report with the fact that the Fed will have extremely limited visibility into the inflation data as well, we still expect that a December pause is the most appropriate decision.

The Background: 

A quick-reaction may be to anticipate a downward revision to September payrolls in next report, but the initial response rate for the survey was an impressive 80% – the highest rate since 2019 – meaning we shouldn’t count on revisions to explain this divergence between the strong payroll print and the uptick in the unemployment rate. Despite a strong rebound in payroll growth (up 119k), the unemployment rate ticked up for the 3rd consecutive month. What’s interesting is the majority of private sector payroll added jobs in September (56%) yet, the primary driver of the rise in the unemployment rate was a 98k rise in permanent job losers, accounting for just under half of the rise in unemployed workers. Surprisingly, the job leavers (i.e. workers who voluntarily leave their jobs) were the second largest contributor to the rise in the unemployment rate – a deviation away from the low quit rate seen throughout most of this year. And the second consecutive rise in the labor force participation rate is surprising given that we saw a record number of retirements in August and September. This report will put greater attention on the estimates of breakeven pace of employment, which we estimate is around 40k per month.

The Details:

Here are the most important things that we learned from the September labor market report:

1)    Cyclical growth has improved but structural sectors continue to support the bulk of hiring

• Non-cyclical job creation accounted for half of US job growth in September, with health care and social assistance adding +57K jobs. 

• Government hiring in September (+22K) completely offset the August pullback. The entirety of the uptick was accounted for by state and local hiring (two thirds from the education sector), as the federal government shed -3K jobs in September.  

• Cyclical services-sector hiring improved notably in September (accounted for one-quarter of US jobs added) after four months of weakness. The strength was concentrated in leisure and hospitality (where hiring has ramped up materially) and wholesale and retail trade. 

• The goods sector added jobs for the first time in five months. This was entirely led by a rebound in the construction sector driven by hiring of specialty trade contractors in the nonresidential sector and heavy and civil engineering construction. 

2) Trade-exposed sectors are showing signs of faltering

• Despite the bright spot that was healthy cyclically exposed services sector hiring, trade-exposed sectors are shedding jobs in a big way. We saw -25K jobs shed in transportation and warehousing, the largest single-month decline in over two years. The manufacturing sector also shed jobs for the 5th month in a row (-6K) alongside temporary help services, which tends to support the manufacturing sector. 

3) September was marked by an uptick in permanent layoffs and quits 

• The unemployment rate unexpectedly ticked up despite an exceedingly strong payroll print, but it was not young job seekers under 20 driving the unemployment rate up. The unemployment rate moved notably lower for this cohort.

• Permanent layoffs accounted for 50% of the uptick in unemployment, but at the other end of the spectrum, quits accounted for another 30%.

• As a reminder, this will be the final UER print that the Fed has going into the December meeting, as the October household survey was canceled.

• The labor force participation rate grew to 62.4% in September from 62.3% in August as labor force growth (+470K) outpaced population growth (+225K). This surprised us, as data from the Social Security Administration showed a record pace of retirements in August and September. 

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About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.