Nonfarm Payroll Preview: Labor Market Expected to Cool Down in October

The October jobs report will likely prove September's hiring surge was temporary. And given the sharp revisions to nonfarm payrolls throughout the year, the unemployment rate — which is not subject to revisions — may provide a better signal of labor-market conditions.

The median estimate for non-farm payroll is 180k in October, significantly slower than September's strong pace. That will reflect payback from a temporary hiring surge in leisure and hospitality, as well as direct and indirect impacts from the United Auto Workers strike.

The unemployment rate is likely to remain at 3.8%, but as additional workers enter the labor force, it might also rise. A 4.0% jobless rate would trigger the Sahm Rule for identifying a recession and be a sign to policymakers that monetary policy is gaining traction in the real economy.

■ Jobless claims

US initial jobless claims increased by 10,000 to 210,000 on the week ending October 21st, above market expectations of 208,000. The four-week moving average, which reduces week-to-week volatility, rose by 1,250 to 207,500.

On the other hand, continuing claims rose to 1,790,000, the highest since mid-May and well above expectations of 1,740,000, suggesting that jobless individuals are taking longer to find employment.

■ Job openings

Although the number of job openings moderately increased by 56,000 from the previous month to 9.55 million in September 2023,the vacancy-to-unemployed ratio remained at 1.5.

Looking carefully at various industries, the vacancy rates of the information industry, healthcare and social assistance, and government are declining, while the vacancy rates of mining, manufacturing, and finance are rising.

■ Labor cost

The ECI (Employment Cost Index), a key indicator reflecting wage growth, showed that wage growth dropped further from 4.5% in the second quarter to 4.3% in the third quarter. This is in line with the modest trend reflected in ADP wage growth released on Wednesday. The ADP National Employment report showed workers remaining at their jobs saw a 5.7% increase in annual wages, the smallest rise since October 2021. That was down from an increase of 5.9% in September.

■ What's next for the market?

After the release of ADP employment and JOLTS data, CME FedWatch showed that the probability of the Federal Reserve raising interest rates in December dropped from 28.8% to 18.8%, and both stocks and bonds rose, reflecting expectations that an easing labor market could lead to a drop in risk-free interest rates.

The Fed's statements at the November FOMC meeting were more dovish than those in September. Powell said at the press conference,“If you look at the broad range of wages, the wage increases have really come down significantly over the course of the last 18 months to…where they're substantially closer to that level that would be consistent with 2% inflation over time.”

If the NFP data released on Friday is consistent with the employment data released earlier this week, it may further ease the upward pressure on US bond yields and reduce the probability of raising rates in December.