Good News Of The Bad Variety

The US economy added more jobs than expected in September, while the unemployment rate moved lower with participation. Wage growth remained elevated.

Taken together, the data undermined hopes for a Fed pivot, and bolstered the case for additional policy tightening. Or at least that’ll be the narrative.

At 263,000, the headline NFP print topped consensus, albeit not by a huge margin (figure below). Economists expected 255,000. The range of estimates, from six-dozen forecasters, was 199,000 to 389,000.

Revisions added 11,000 to July’s headline, while August’s print was unrevised. The economy has added almost four million jobs this year.

Gains were mostly broad-based, although some major industries “showed little change,” as the BLS put it. Leisure and hospitality added 83,000 positions (consistent with the monthly average for this year and also with the jump on the ISM services employment gauge), health care 60,000, professional and business services 46,000 and manufacturing a better-than-expected 22,000 (in defiance of a sub-50 print on ISM manufacturing employment).

Notably, leisure and hospitality is now down less than 7% from pre-pandemic levels of employment. I still doubt we’ll see a complete recovery this cycle, but we’re closer than I thought we’d get. Health care employment is back to February 2020 levels, no small feat.

Average hourly earnings rose 0.3% MoM and 5% YoY. Both prints matched estimates. The YoY pace is too high to be consistent with the Fed’s inflation target, but too low to keep pace with realized inflation. That’s unfortunate, to put it mildly. It means the Fed will continue to raise rates, piling more economic pressure on workers already struggling with negative real wage growth. The idea (and it’s hard to know whether to laugh, cry or both) is that the best way to engineer positive inflation-adjusted wages is to drive up the unemployment rate. Colloquially, we need to fire some people so that the people who don’t get fired won’t see the entirety of their wage gains eroded by inflation. You can’t make an omelet without a breaking a few eggs. Or a million eggs. Or something.

At 3.5%, the unemployment rate undershot consensus by 0.2%, which is a lot when you’re talking about record lows. No economist out of 71 surveyed by Bloomberg expected a move back down to 3.5%. The participation rate ticked lower to 62.3% (figure below).

Household employment rose and the gain on private payrolls (288,000) suggested ADP might be a semblance of useful again vis-à-vis NFP guesstimating.

All in all, you could suggest September’s report was highly amenable to a “good news is bad news” interpretation. Remember: We live in a backwards reality where less jobs is a good thing, and policymakers are actively attempting to push unemployment higher. So, these sorts of reports suggest officials aren’t trying hard enough when it comes to engineering a recession.

I’m joking, but only a little. The problem in 2022 is that while the risk of a wage-price spiral is very real (I’ve argued it’s already embedded in the economy), it’s not obvious that rate hikes will “solve” inflation. At the very least, we can say that some factors driving price growth are beyond monetary policy’s capacity to influence, which means there’s a risk that central banks will be tilting at windmills at some point.

Time and again over the past two weeks, we’ve heard policymakers say inflation has yet to “respond” to rate hikes. The implication is that inflation is stubborn, or that it’s entrenched, and if we just try hard enough, we can dislodge it. That may be the correct takeaway, but what if it’s not? If inflation is at least partly an independent phenomenon (i.e., not perfectly responsive to rate hikes) incremental policy tightening will eventually bump up against the law of diminishing returns.

It’s anyone’s guess where the tipping point is. “Long and variable lags” means it’s impossible to gauge the impact of the hikes already delivered (figure above).

That’s not to suggest rates didn’t need to rise or even to say they don’t need to rise further still. As regular readers will readily attest, I defected from “team transitory” in early February. I’ve been a strident hawk ever since, flipping back dovish only this month.

My point is straightforward: If we keep raising rates and price growth doesn’t abate (or if we can’t honestly say that any abatement we do observe is the direct result of incremental policy tightening), then persisting in rate hikes chances a meltdown in rates-sensitive sectors of the economy (like housing) and poses financial stability risks, all for not much in the way of gains on the inflation front.

Based on this week’s hawkish cacophony from Fed officials, it’s not obvious that policymakers take those risks seriously. Or if they do, they can’t say as much publicly. I’m not sure which of those possibilities is more disconcerting.

The Fed will probably view September’s jobs report as a green light for a fourth consecutive 75bps hike at the November gathering. That’ll be a mistake.