It had to happen sometime. The longer in the tooth an economic expansion gets, the more likely it is that job growth will slow. Such is the nature of business cycles.
In September, following a long stretch of strong job growth in the U.S., employers added a relatively small number of workers – 142,000 – following a downwardly revised gain of 136,000 for August (previously reported at 173,000).
These gains are much slower than the more than 200,000 per month that markets have become accustomed to in the past few years. Recent upheaval in global financial markets may have played a role by making employers cautious about hiring, highlighting the importance of weighing financial conditions when projecting economic growth and constructing portfolios.
Is this slowdown simply a break from the trend, or is this likely to become the norm for job growth in the time ahead? It is more likely the latter. If it is, what investors will want to see in its place is wage growth, because a job slowdown needn’t be an expansion killer so long as total growth in compensation (gains in aggregate hours worked multiplied by wage gains) stays strong. This is what generally happens in the latter stages of an expansion: slower job growth but bigger wage gains.
Even if markets are surprised by the September U.S. jobs data, the Fed’s own econometric models project a slowdown, although not to the degree seen over the past two months, at least not just yet. In order to launch its rate hike cycle, the Fed probably would like to see gains in a zone of 175,000 or so, a strong level relative to monthly labor force growth of under 100,000. That said, its models show job growth slowing to under 150,000 persons per month by the middle of next year, owing to a reduction in the number of workers available to hire, thanks to many years of robust hiring.
So, welcome to the new status quo for job growth, albeit a bit too soon in the Fed’s eyes.