Economic spotlight turns to US jobs data as markets are roiled by high rates and uncertainties

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The focal point of economic attention now shifts to the impending release of the September jobs report by the United States Labor Department. This scrutiny comes amidst turbulent times in financial markets, marked by elevated interest rates and pervasive uncertainties.

Over the past two and a half years, the American job market exhibited remarkable resilience even in the face of surging inflation and the Federal Reserve’s rapid escalation of interest rates—a pace not seen in four decades. However, as the September jobs report looms, it is poised to reveal the extent of this resilience. Recent weeks have ushered in additional economic challenges, including soaring long-term interest rates, escalating energy costs, the reinstatement of student loan payments, widening labor strikes, and the looming specter of a government shutdown.

Economists’ projections suggest that employers added approximately 163,000 jobs last month, representing a robust increase. Nonetheless, this figure reflects a noticeable decline from the earlier pace set this year, when the economy was adding an average of 310,000 jobs per month during the first quarter. Simultaneously, the unemployment rate is anticipated to dip to 3.7%, approaching a 50-year low, down from August’s 3.8%.

Yet, a growing body of evidence is pointing towards a gradual cooling of the job market, a development that aligns with the Federal Reserve’s objectives. A deceleration in hiring can alleviate pressure on employers to offer higher wages to attract and retain talent, subsequently contributing to cooling inflationary pressures. Typically, businesses resort to raising prices to offset rising labor costs.

Another noteworthy trend is the decline in the number of Americans voluntarily leaving their jobs. This contrasts with a surge in resignations in the wake of the pandemic. Such resignations were often driven by the prospect of better-paying opportunities elsewhere, suggesting that workers now perceive fewer attractive alternatives.

While the government reported a surge in open job positions in August, other indicators, such as those compiled by the job listings website Indeed, reveal little change that month and a sustained decrease in job vacancies over the past year.

Nonetheless, the job market’s robust performance over an extended period implies that a gradual slowdown, if sustained, would maintain its overall health. The number of Americans seeking unemployment benefits, a metric often mirroring layoff rates, has remained persistently low. Many companies are cautious about shedding workers, having encountered difficulties in rebuilding their workforce following the swift and robust recovery from the 2020 pandemic-induced recession.

Surveys conducted by the Institute for Supply Management indicate that both manufacturing and service sector companies continued to add jobs last month. Moreover, among banks, restaurants, retailers, and other service sector entities, hiring actually accelerated in September compared to August, according to the ISM.

The release of the September jobs report assumes particular significance as the Federal Reserve rigorously analyzes every piece of economic data to determine whether another interest rate hike is warranted this year or if the current elevated rate should persist into the following year. After implementing 11 rate hikes since March 2022, the Fed’s benchmark rate currently stands at a 22-year high of approximately 5.4%. These rate increases have led to markedly higher borrowing costs for consumers and businesses across the economy.

The Federal Reserve is now confronted with a delicate balancing act. On one hand, officials, including Chair Jerome Powell, emphasize that inflation remains significantly above their 2% target, potentially necessitating another rate hike to bring it under control. Simultaneously, several Fed policymakers caution against raising borrowing rates to a level that could precipitate a severe recession.

Mary Daly, President of the Federal Reserve Bank of San Francisco, has suggested that a cooling labor market might convince the Fed to hold off on further hikes this year. She posits that if a cooling labor market coincides with a return of inflation to target levels, interest rates can remain steady to allow existing policy effects to persist.

In contrast to earlier expectations that the Fed might reverse course and lower interest rates, financial markets now anticipate that the central bank will maintain its key rate at an elevated level well into 2024. This shift in market sentiment has contributed to the surge in the yield on the 10-year Treasury note since July, reaching a 16-year high this week, albeit with a slight decline to 4.7% on Thursday.

The 10-year Treasury yield serves as a benchmark for various borrowing costs, encompassing mortgages, auto loans, and business borrowing. Consequently, the average rate on a fixed 30-year mortgage has surged to nearly 7.5% this week, marking its highest level in 23 years. These higher yields have, in turn, exerted downward pressure on stocks, with the S&P 500 index experiencing a 7.2% decline since late July.

The escalation of longer-term interest rates coincides with several other economic challenges, such as elevated gasoline prices, the resumption of student loan payments, the ongoing autoworkers’ strike, and the looming threat of a government shutdown next month. These factors collectively threaten to constrain consumer spending and potentially slow down the economy’s growth in the current October-December quarter, with some estimates suggesting an annual rate as low as 0.7%, a significant drop from the roughly 3.5% pace observed in the July-September quarter.

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