U.S. October jobs report: Moderation in hiring as wage gains outpace inflation

REAL ECONOMY BLOG | November 03, 2023

Authored by RSM US LLP

Hiring in the American economy moderated in October, pointing to a cooler pace of growth and inflation that is a much-needed elixir following the torrid pace of hiring and expansion of recent months.

The economy added 150,000 jobs in October with the unemployment rate at 3.9%, the Bureau of Labor Statistics reported on Friday. Those figures, coupled with the downward revision of 101,000 jobs to initial estimates of hiring over August and September, reaffirm the Federal Reserve’s recent decision to hold rates steady.

The employment data underscores our call that the Fed has reached the peak in its rate hike cycle as it works to restore price stability.

It is important to note that the economy needs to add only 75,000 jobs a month—compared with 200,000 a decade ago—to stabilize employment given demographic changes that have led to a slower annual pace of growth of 0.5% in the workforce.

From out vantage point, the 150,000 gain in total employment and an unemployment rate in line with the 4% that we think is consistent with full employment is to be celebrated.

The Bureau of Labor Statistics indicated that manufacturing employment was dragged down by 33,000 workers laid off because of the United Auto Workers strike. But these workers will return to the workforce in the next month, implying that the top-line figure modestly understates the pace of hiring and affirms a rock-solid American labor market.

At a certain point, we think the false dichotomy between recession and soft landing will fade. Instead, we will be talking about an expanding economy that is capable of growing at a faster pace with lower inflation than is commonly acknowledged, bolstered by a pace of productivity that will push living standards higher.

Policy implications

The October increase in hiring and the downward revision to the August and September initial estimates support the Federal Reserve’s recent decision to hold the federal funds rate between 5.25% and 5.5%, and points to a sustained pause.

We have made the case for some time that the Fed has reached the peak in its rate hike cycle and that it will need to pivot toward stabilizing real long-term yields and then reducing the policy rate as the economy slows.

The lagged impact of past rate hikes and the backup in yields over the past few months will be fully realized as growth slows below the long-term trend of 1.8% over the next six months.

The data

The most encouraging aspect of the October employment report was the increase in average hourly earnings of 0.2% on a monthly basis and 4.1% from a year ago.

The fact that the top-line increase as well as the three-month average annualized pace of 3.9% are above inflation points to income-driven gains that will support consumption as the holidays approach.

We expect a 5% increase in holiday spending on a year-over-year basis. Friday’s data we think points to a modest upside risk to that estimate.

Total private employment increased by 99,000 jobs in October, driven by an increase of 23,000 positions in construction and 110,000 in private service-providing jobs.

The United Auto Workers strike resulted in a net drag on employment of 33,000 as manufacturing contracted by 35,000 jobs. That will reverse in the next sample period, and we expect that a policy tailwind linked to the construction of domestic manufacturing capacity in semiconductor chips will bolster overall hiring in that sector.

Private education and hiring added 89,000 jobs, leisure and hospitality added 19,000 and government added 51,000. Professional business services had an increase of 15,000 positions, retail trade added 1,000 and 7,000 temps were hired on the month. The goods-producing sector contracted by 11,000 positions.

Aggregate hours worked increased by 1.8%, which is slightly above the three-month run rate of 1.4%. The labor force participation rate ticked down to 62.7% from 68.8% previously, while 83.3% of prime-aged workers 25 to 54 years old were employed.

The median duration of unemployment stands at 8.9 weeks, which means that if someone loses a job, that worker will find one in roughly two months.

The takeaway

The American labor market continues to expand though at a more modest pace than the initial estimates implied. The 150,000 increase in total employment is slightly less than the three-month average of 204,000 and is exactly what policymakers at the Federal Reserve want to see as they work to restore price stability.

Wage gains in the report imply that the three-month run rate has slowed to 3.9%, which is above an inflation rate that is going to ease further.

A slower pace of hiring coupled with wage gains that are above inflation points to further growth in the economy even if it is well below the gaudy 4.9% rate of the third quarter.