US Watch - Weak job growth takes off the pressure

The September labour market report was somewhat weaker than we expected, although its qualitative picture broadly matched our expectations. The headline figure of 29k was below both consensus (90k) and our forecast (65k), while the previous two months were revised down by a substantial 60k. When those figures were released, we noted that they would likely be revised lower. The unemployment rate rose to 4.2%, largely because the participation rate increased by 0.2pp. Thus, while the headline numbers point to a soft report, the underlying picture is more mixed: unemployment rose partly because people on the sidelines resumed looking for work. One notable figure was the modest 0.1% m/m increase in average hourly earnings, which lowered the y/y rate to 3.0%. This is good for the inflationary outlook, but potentially negative real earnings growth could weigh on consumption.

What drove the weak job gains? Employment growth in healthcare and in leisure and hospitality was weaker than usual. Government employment also declined after surprising to the upside in August. Meanwhile, construction and manufacturing continued to outperform their longer-term trends.

We see this report as consistent with our base case: the apparent resurgence in the labour market over the previous two reports was somewhat of a mirage. The three-month average of 51k is solid given labour supply, but it does not indicate a hot or tight market. This report, especially alongside the downside surprise in the PCE report earlier this week, removes the pressure on the Fed to hike in October. We still expect persistent inflationary pressure from the energy shock to prompt one more Fed hike in December, for reasons similar to those in September: to prevent pass-through to consumer prices and wages.