October 27, 2023
The labor market likely remained solid in September. The data on unemployment insurance claims suggest, if anything, that the labor market may have tightened somewhat as the number of weekly claims fell to almost 200,000. The number of people collecting unemployment insurance benefits remains at 1.1 percent of the labor force, an extraordinarily low level, although somewhat above the lows hit last summer.
Other data on the economy seem to indicate it is still growing at a healthy clip. People are going to restaurants, flying, and taking car trips in large numbers.
There are risks on the horizon. If the UAW strikes grow and last a long time, it will be a hit to the economy. The restart of student loan payments will be a hit, although much of the reporting likely exaggerates its impact.
How Much Was Real in August’s Jump in Labor Force Participation?
Perhaps the biggest question to be answered by the September report was the extent to which the 0.2 percentage point jump in labor force participation reported in August was real. This jump corresponds to an increase in the size of the labor force of 740,000. This is an annual rate of increase in the labor force of almost 9 million.
Needless to say, the labor supply did not suddenly increase by 740,000 in a single month. This could only happen with some very extraordinary developments in the economy. It does not fit with any of the other data we have for the month.
It is not unusual for the household survey to show a large jump in the labor force that doesn’t correspond to anything in the economy. In June of 2003, the report showed an increase in the size of the labor force of 556,000. It fell by 571,000 in July. It increased by 545,000 in March of 2014 and then fell by 649,000 in April.
Since the August jump surely was not real, it is likely we will see some fall in the labor force number reported for September. It will be best to compare the labor force participation data for the month with the July data, rather than worrying about the drop from August.
More importantly, the September data will tell us whether the 0.3 pp rise in the unemployment rate was real. At 3.8 percent, the unemployment rate is still quite low by historical standards. But that story could change quickly if we are on a trend of rising unemployment. There is little other data in the economy to suggest that we are on such a trend, but a drop in the unemployment number reported for September would go far towards relieving fears.
Is Wage Growth Slowing?
While the price indices show solid evidence that inflation is slowing towards a non-inflationary pace, there are still many analysts concerned that wages are growing too rapidly to be consistent with the Fed’s 2.0 percent inflation target. The average hourly wage grew by just 0.2 percent in August, putting the annualized rate over the last three months at 4.5 percent, down from 4.9 percent for the three months ending in July, and a rate of more than 6.0 percent at the start of 2022.
However, 4.5 percent is somewhat faster than would be consistent with the Fed’s inflation target. The growth rate in wages would have to be somewhat under 4.0 percent, even if we allow that there will be some shift back from profits to wages, after the big pandemic jump in profit shares. Some further slowing could calm the Fed and perhaps encourage it to start pivoting on interest rates.
Hours and Productivity Growth
Productivity growth since the pandemic has been roughly in line with the pre-pandemic pace of 1.4 percent, although the quarterly data have been even more erratic than usual. We had an extraordinary number in the second quarter, with productivity reportedly growing at a 3.5 percent rate, after falling at a 1.2 percent rate in the first quarter.
So far, we look to be on a path for another strong quarter for productivity growth, with hours growth likely under 1.0 percent, and GDP growth well over 3.0 percent. The hours numbers for September will give us a clearer picture.
The hours data will also give us important information on recession risks. Reductions in hours typically precede layoffs, as companies don’t want to incur the expense of finding new workers when business picks up. The average workweek had fallen to unusually low levels in non-durable manufacturing and leisure and hospitality, 39.1 hours and 25.2 hours, respectively. It will be important to see if these numbers stabilize or fall further in September.
Job Growth
The establishment survey showed a gain of 187,000, but with downward revisions to the June and July data, the three-month average was just 150,000. This may still be a bit higher than is sustainable given the underlying demographics, but it is close enough that the Fed should be satisfied.
The mix will also be important. Job growth in health care has accounted for almost 40 percent of new jobs in the private sector. It would be striking if this pace (almost 70k a month) continues. Construction and manufacturing have continued to add jobs at a healthy pace. It would be difficult to imagine a recession where these two highly cyclical sectors are still increasing employment.
Share of Unemployment Due to Quits
The share of unemployment due to workers voluntarily quitting their jobs has historically been a good measure of the strength of the labor market. This figure hit a record high of 15.8 percent in September of 2022. It has since fallen back to more normal levels and stood at 12.8 percent in August. This is still consistent with a strong labor market, but certainly not a level that should prompt concerns about inflationary pressures.
Concerns About a Too Tight Labor Market and Recession Exist Side by Side
With the Fed continuing to place its focus on inflation, it is impossible not to be concerned that the strength of the labor market will give it a basis for further rate hikes. Clearly, whatever basis there might have been for this concern earlier in the year has faded substantially.
At the same time, many analysts continue to raise concerns about a recession on the horizon, which is not unreasonable given the extraordinary jump in interest rates we have seen in the last year and a half.
