NEWS AND INSIGHTS | INSIGHTS
CIO Notebook: September Payrolls Show Soft Landing Still on Track
October 04, 2024
We believe that there could be continued volatility over the coming weeks, but that positioning for 2025 should incorporate continued moves lower in both interest rates and inflation – even as economic growth remains on track.
Following on two weeks of mounting concerns, September’s non-farm payrolls release came at a pivotal moment for investors seeking confidence that the equity market rally, buoyed in large part by economic resilience, could potentially continue through year end. The U.S. economy added +254k jobs in the month, well above the +150k expected and north of the trailing 12-month average of +203k. Sectors leading the way were leisure & hospitality, health care, government hiring, construction, and retail trade, adding +78k, +72k, +31k, +25k, and +15k jobs respectively. While manufacturing remains a laggard, the sector lost only -4k jobs in the month – a marked improvement from last month’s -24k report. Perhaps even more encouraging were the upward revisions to July and August data of +55k and +17k, respectively. As a reminder, both prints were weaker than expected on initial release, resulting in concerns about a more sharply decelerating U.S. economy; these were also the first upward non-farm payroll revisions since March of this year.
Divergence between the establishment survey – which provides the above data – and the household survey has been cited often this year as evidence that the U.S. labor market is not as strong as it seems; these cries reached a crescendo last month when it was reported that non-farm payrolls may have been overstated by as much as +818k over the prior year ending in March 2024. However, this month the household survey indicated that there were +150k persons added to the work force; the addition of +451k employed persons easily offset the -281k who lost their jobs. In addition, the unemployment rate fell for the second month in a row to 4.1%, while the underemployment rate, measuring individuals who are working part time for economic reasons and discouraged workers, fell for the first time in almost a year to 7.7% – even while the participation rate remained steady at 62.7%.
Wages too were stronger than expected, up +0.4% month-over-month and +4.0% year-over-year. While wages remain higher than the Federal Reserve’s (Fed) inflation target, our view is that this dynamic is more encouraging than worrisome at this point in the cycle. With headline inflation seemingly on a stable downward path, annualizing at a +2.5% rate, consumers could benefit from greater price stability while still enjoying an increase in their discretionary income. This improvement in discretionary income could be compounded by household savings, which were also revised higher for the prior year in a recent release from the U.S. Bureau of Economic Analysis.
With this report, what has changed most significantly are expectations for another 50 basis point cut from the Fed in 2024. Instead, expectations are now for a more subdued pace of 25 basis points in each of the next two meetings and a continuation of rate cuts into the first half of 2025. While critics could state that the Fed is setting the stage for a reacceleration of inflation if they adopt a dovish stance at this juncture, labor market data in our view is not pointing to the type of supply-demand mismatch that precipitated significant wage gains and the post-pandemic surge in consumer inflation. In addition, while investor reaction is positive in today’s session, a shift in the pace and eventual endpoint for the Fed, if one were to occur, would likely weigh on investors who have priced in a meaningful tailwind from accommodative monetary policy.
Admittedly, with the Fed’s first (outsized) cut in the rearview mirror, investors have focused attention instead on several key risks over the last two weeks. While apparently on the road to resolution, a massive strike of dock workers in the U.S. reminded investors of the threat of supply chain disruptions, and the potential for a widening war in the Middle East sent energy prices higher with just four weeks left before too close to call elections at the presidential and congressional levels. The economic impact of the devastation brought by Hurricane Helene, too, is difficult to measure at this time, but is likely to impact, perhaps meaningfully, economic data released for the period. As such, we believe that there could continue to be volatility over the coming weeks, but that positioning for 2025 should likely incorporate continued moves lower in both interest rates and inflation – even as economic growth remains on track.
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