Gradual signs of cooling

October labour market data generally affirmed the sense of cooling labour markets. The Jobs report surprised to the downside as nonfarm payrolls came in at 150k relative to consensus of 180k. Service sectors, such as government, healthcare and social assistance, primarily attributed for job gains. Manufacturing recorded job losses, although they could be partly explained by the UAW’s strike. The cooling picture was further underscored by August and September releases being revised down, corresponding to a combined downward revision of 101k.

JOLTs Job Openings were little changed at 9.6m in September, with unfilled vacancies per unemployed hovering around 1.50, markedly above the pre-pandemic range of 1.2. Layoffs painted a similar picture, edging down to 1.52m (the lowest level since December 2022), suggesting that labour markets remain tight. But even so, the unemployment rate continued to tick slightly higher to 3.9%, as the household survey recorded a 348k decline in the number of employed workers.

Growth in wage sum moderated as average hourly earnings maintained declining momentum in October, printing 0.21% m/m (4.1% y/y) compared to 0.33% m/m (4.3% y/y) in September. As wage growth is a key driver of nominal consumption, we continue to forecast cooling consumption growth towards winter, and thus also easing inflation. That said, alternative indicators, such as the Employment Cost Index, Atlanta Fed’s median wage tracker and Indeed Hiring Lab’s tracker based on job postings suggest that nominal wage growth still remains too fast for comfort.

Productivity growth surged to a 4.7% annualized rate in Q3, exceeding the already robust increase of 3.6% in Q2. Besides contributing to the upside surprise in Q3 GDP, upbeat productivity growth has considerably calmed unit labour cost growth. As such, persistently stronger productivity growth would increase the chance of a ‘goldilocks’ soft landing, as inflation can continue to cool even without a sharp slowdown in growth. That said, forecasting productivity remains as difficult as ever.

Nevertheless, also the latest leading data has continued to support the case for a soft landing, with the service sector continuing to ebb while manufacturing recovered. PMI/ISM price indices suggest that the wave of inflation is mostly over, and employment indices also ticked slightly lower. However, not all indicators paint a uniform picture. For example, NFIB’s survey data continued to point towards tight labour markets and even rising price pressures, despite some easing since 2022.

As a bottom line, we continue to see tight, but gradually easing labour markets conditions. While labour demand has remained stronger than anticipated, recovering labour supply and stronger productivity have eased upward pressure on labour costs. Accordingly, we still believe that the Fed will maintain rates at current restrictive levels, with the first rate cut pencilled in for March 2024. Renewed rise in wage pressures, whether driven by persistent demand, supply recovery losing steam or weaker productivity growth, could push the Fed towards maintaining rates high for longer.

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