NFP Review: Labour Market Remains Tight Despite Low NFP

Summary

• NFP printed at 12k, below 100k consensus.
• The low print reflects mainly the impact of strikes and lower immigration, and to a lesser extent the hurricanes.
• The labour market remained tight and wage growth accelerated.
• Wage growth is likely to remain sticky as the immigration surge is over and union militancy seems stronger than pre-pandemic.

Market Implications

• I continue to expect the Fed to cut twice in 2024 as the Fed is reactive to short-term inflation prints, and inflation is likely to remain within the Fed’s comfort zone.
• Longer term, I see growing risks the Fed will not be able to cut in 2025 due to inflation stickiness.

Large Negative NFP Surprise

October NFPs printed 12k against 100k expected and the two months net revisions were negative 112k (Table 1 and Chart 1). Sam’s model predicted the downside surprise.

After the October print and revisions to August-September, 3m and 6m average NFP are now well below the 2019 average of 160k (Chart 1). However, unemployment at 4.1% remains historically low.

Employment in the household survey, unadjusted and adjusted to NFP definitions, decreased by 368 th. and 587 th., respectively (Chart 2). The unusually large difference reflects the undercounting of illegal migrants in the household survey since 2022.

The low print reflected mainly the impact of strikes and lower immigration, and to a lesser extent the hurricanes.

Significant Strike Impact

Workers on strike are not counted as employed in the payroll survey. According to the strike report, 44 th. workers were on strike in October, up from three thousand in September (Chart 3). These included Boeing workers and hospitality, manufacturing and motion pictures workers.

The actual impact of the strike on employment is likely to have been larger because of furloughed workers, as a result of the shortage of parts created by the strikes.

With Boeing workers agreeing to go back to work, the impact of strikes is likely to be much lower in the November payroll report.

Lower Immigration

Following the tightening of the Southern border in June, Border Patrol encounters with undocumented migrants have declined (Chart 4). This suggests the undocumented immigration surge is over.

Slower labour supply growth could explain the past few months combination of much lower NFP growth and falling or stable unemployment.

Limited Hurricane Impact

The impact of hurricanes on NFPs seems to have been limited. The households survey series on employed but not at work because of weather jumped (Chart 5). However, by contrast with the July NFP, there was no associated increase in temporary layoffs, which could signal greater employers resiliency.

Similarly in the establishment survey, changes in weather-sensitive employment categories such as construction or leisure and hospitality were limited.

This is in line with jobless claims that have changed in a similar manner in hurricane affected states (FL, GA, NC, SC, TN, VA) and other states (Chart 6).

Labour Market Remains Tight

Despite the low headline NFP print, the labour market remained tight in September:

• Unemployment did not increase (Chart 7).
• Unvoluntary (‘for economic reasons’) part-time work was unchanged (Chart 8).
• The spread of African American and Hispanic unemployment over white unemployment narrowed further (Chart 9).
• The share of unemployment explained by more people looking for jobs, as opposed to being laid off, fell but the series is noisy and the 3mma remains close to post-pandemic highs (Chart 10).
• The employment to population ratio ‘EPOP’ fell somewhat, in line with the 10bp fall in participation, but remained close to post-pandemic highs (Chart 11).
• Wage growth accelerated both MoM and YoY, which is consistent with the Atlanta Fed median wage estimate (Chart 12; the Atlanta Fed will publish the October median wage this week).

Wage Growth to Remain Sticky

While the impact of the strike and hurricanes is likely to dissipate going forward, tighter border controls are here to stay, irrespective of who wins the elections. This means lower labour supply growth.

At the same time, strong GDP growth – Q3 was 2.8% and the Atlanta Fed nowcast for Q4 is currently running at 2.3% – implies labour demand will remain strong, and the labour market will remain tight.

Furthermore, while union militancy is not as strong as in 2023, it remains stronger than before the pandemic. If workers manage to increase their market power, there is a risk the Phillips curve could steepen, i.e., wages and prices could become more responsive to the output gap that is currently positive.

These suggest a risk wage growth may not fall much below its current 4%, which is above the 3.5% the Fed considers consistent with 2% inflation.

Market Implications

I continue to expect the Fed to cut 25bp in November and December. The Fed is reactive to short-term inflation prints and these are likely to remain within the Fed’s comfort zone in 2024.

Longer term though, inflation is likely to prove stickier than the Fed expects. If so, the Fed will have to reassess its medium-term easing plans. However, such a reassessment is unlikely before the elections, since these could have such a deep impact on next year’s macro backdrop.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)