Economic Update: November 2023

Job gains were strongest in health care and social assistance last month, with 77,000 jobs added, nearly half of October’s total gains. Government added 51,000 jobs, but while overall jobs in this sector have rebounded to pre-pandemic levels, state and local jobs (particularly teachers) remain 0.4% under. Leisure and hospitality, which saw robust gains last month, added only 19,000 positions. The notable decline in manufacturing employment is unsurprising given the recent UAW strike, which likely reduced payrolls by around 30,000 in October. With a successful resolution, we should expect those workers to reappear in the data next month.

October’s rise in the unemployment rate suggests a possible increase in layoffs – something that until now, most employers have generally avoided. However, last month’s household survey showed a 200,000 increase in job losses or completed temporary assignments and that the number of layoffs increased in October by 92,000. In addition, some 96,000 people reported being out of work because of a strike or labor dispute in October, the most reported since 1997.

[A brief note on the divergence between October’s two surveys. The monthly jobs report contains two surveys: one surveys businesses about employment, hours and earnings, while the other inquires households about their status in the labor force. When the surveys show conflicting data, it’s standard practice to rely more heavily on the establishment survey because the larger sample size generally supports more precise estimates. The household survey’s smaller sample makes it more volatile, but it can also be an early indicator of turning points in the economy.]

Wage growth continued to slacken in October, a data point that the Fed is watching closely. Average hourly earnings increased by 0.2% from September, which is less than economists expected and shows deceleration from September’s 0.3% gain. Annual wages rose by only 4.1% last month, the slowest pace since June 2021. October’s report also noted that the average workweek dropped slightly, indicating companies aren’t trying to squeeze more productivity from existing employees. Coupling wage data with the slowdown in hiring and increased unemployment, it would seem reasonable to believe some inflationary pressure is easing, and the job market has begun to slow its engines.

As noted in the opening, however, one data point troubling some economists is increasing unemployment and the factors surrounding the change:

• “What concerns me is when we see such an increase in the unemployment rate, it tends to trend higher, – Blerina Uruci, chief U.S. economist at T. Rowe Price.
• “The unemployment rate edged higher to 3.9%, which itself is not concerning given our expectation for ongoing softening… However, the reason for the uptick is more problematic: labor force participation backtracked for the first time since April, and employment as reported by the household survey swung significantly negative.” – Dante DeAntonio, senior director at Moody’s Analytics
• Bloomberg economists concurred: “The biggest signal from the report was the uptick in the unemployment rate— that outweighs the significant slowdown in headline nonfarm payrolls and large negative revisions, in our view.”

Several experts also acknowledged we are inching closer to triggering the “Sahm Rule”, which has until now proven to be a reliable predictor of recession. The rule was created by former Federal Reserve economist Claudia Sahm, and considers the start of a recession the point at which the three-month moving average of unemployment rises by a half-percentage point or more relative to its low during the previous 12 months. Ms. Sahm, for her part, has publicly commented she’d be quite happy to see her measure break in this environment: “Everyone who is a macroeconomist, including myself, has made some very big errors thinking about the economy since the pandemic showed up.” Per the “Sahm Rule,” we’re now at the point where recession risks are elevated, although not yet at the point where it’s likely that a recession has already begun.

In the decade before the pandemic (a period that notably included the lengthiest stretch of labor market expansion), monthly job growth averaged about 180,000. October’s payroll gains continue a 34-month streak, the fifth-longest job growth on record. And considering there are still about 1.5 open jobs for every unemployed person, there’s room for continued growth. Perhaps the most concise synopsis of last month’s report might come from Nick Bunker, head of economic research at Indeed: “[October]’s jobs report is consistent with both a mild loosening of the labor market on the way to a soft landing, and potentially the beginning of a more troubling downturn.”