"Weak" US jobs growth won't derail Fed taper

US Macro: Labour market is stronger than it seems

Last Friday’s payrolls came in much weaker than expected, with just 194k jobs added in September, compared to consensus expectations for a 500k rise. At the same time, the unemployment rate fell sharply, from 5.2% to 4.8%, suggesting much stronger labour market conditions. What is going on?

Monthly average jobs growth still solid…

Even in normal times, monthly jobs growth is notoriously volatile, but it has been especially so through the pandemic – even during the recovery phase this year. While employment growth has clearly slowed sharply from the blockbuster July gain of over 1m jobs, net revisions have added another 169k jobs in September, keeping the 3 month moving average (as well as the average for 2021 so far) well above 500k. We consider this level of average jobs growth to be comfortably sufficient to continue bearing down on the unemployment rate, and to support above-trend GDP growth. At the same time, even as employment hasrecovered, the average hours worked per employee remains well above the pre-pandemic level, suggesting employers are dealing flexibly with a shortfall in workers.

…albeit hampered by constrained labour supply

While the labour market is stronger than the monthly fluctuations suggest, it could be doing a lot better, however. Labour force participation fell in September, to 61.6% from 61.7% (pre-pandemic: 63.3%), contrary to expectations that the expiry of pandemic-related unemployment benefits and the reopening of schools would drive a recovery. It could well be that September was too soon to expect an increase. Consumers have built up significant excess savings during the pandemic, reducing the immediate pressure to return to the labour market. Meanwhile, although schools have largely fully reopened, the recent Delta waveof infections could be making those with parenting responsibilities more reluctant to take on jobs out of fear that renewed school closures would put them in a difficult predicament vis-à-vis childcare. Indeed, we note that the fall in female participation during the pandemic was significantly bigger than that for men, and the recovery since has been slower among women. It may take time for these concerns to fade, and for workers to believe that the pandemic is truly a thing of the past. In the meantime, this shortfall in participation will likely continue to constrain jobs growth.

Indications of labour market tightness suggest the Fed will forge ahead with tapering

Many other indicators meanwhile suggest a very tight labour market, with strong labour demand. Job vacancies are at a record level, while the rate of people quitting jobs to take on new roles (likely drawn by higher wages) are well above the pre-pandemic level. Averagehourly earnings growth (which is now less subject to the compositional distortions of the early pandemic period) is also very strong, growing at a >5% annualised pace in recent months. These indicators are consistent with PMIs and other business surveys that suggest companies continue to face difficulties staffing their operations. As such, even if Fed Committee members were to take the view that current jobs growth is ‘weak’, they would likely conclude that this is driven by supply side constraints rather than a lack of demand, and therefore not a reason to hold off from the withdrawal of stimulus. We therefore expect the Fed to proceed with a taper announcement at the 2-3 November FOMC meeting, with tapering beginning in December and asset purchases ending mid-2022.

Could still see a significant recovery in labour supply in 2022

While unlikely to come soon enough to derail the Fed’s taper plans, we could yet see a significant reversal in labour market dynamics in the course of 2022, if labour supply ends up recovering back to pre-pandemic levels. Our base case is for a gradual improvement in labour supply, but that the labour force participation rate will remain around 1pp lower than before the pandemic. Should labour supply recover more significantly, slack in the labour marketwould be higher than currently assumed, dampening wage growth and in turn broader cost pressures. Depending on the overall inflation picture at the time, this could end up delaying the start of rate hikes – something we currently expect to happen in early 2023.