Weaker Jobs Report Gives the Fed More Wiggle Room

A weaker than expected jobs report for October showed that the economy may finally be slowing, after nearly two years of overheating. U.S. employers added 150,000 jobs in the last month while the unemployment rate increased to 3.9%. Wage growth also softened slightly, easing pressure on inflation. This report gives the Federal Reserve more room to maneuver as it tries to get the economy back to normal after the economic disruptions of the pandemic.

Top Takeaways from the Report

Growth Slowed in October

The U.S. labor market softened in October, after unexpected strength the previous month, according to the Bureau of Labor Statistics. Employers added 150,000 jobs last month, down from revised growth of 297,000 jobs in September. This is lower than the 179,000 jobs analysts had expected were added in the month.

Monthly job growth was slowed by weakness in manufacturing, which shed 35,000 jobs in October. It also reflects impacts of the United Auto Workers strike. Employment in the auto industry fell by 33,000 jobs in October. However, with the settlement of trade disputes, those workers have now returned, which will be reflected in the next jobs report.

The unemployment rate increased slightly to 3.9% in October, from 3.8% in September. This is the highest rate since January 2022, but remains historically low. The unemployment rate has been below 4% for nearly two years, reflecting the tightest labor market since the late 1960s.

Labor participation didn’t change much in October, recording a slight drop to 62.7% compared to 62.8% in September. The labor force participation rate is the percent of the working-age population that is employed or looking for a job. Labor participation is still below the pre-pandemic rate of 63.3% recorded in February 2020.

Even with strong employer demand for labor, many people continue to sit on the sidelines and out of the labor force. The participation rate has also varied widely among different groups over the past three years. Labor participation has essentially returned to pre-pandemic levels for workers 25-54 years old, for women, and for racial and ethnic minority groups. However, workers over 55 years of age continue to stay on the sidelines, with a participation rate far below levels before 2020.

Wage growth continued to soften in October, slowing to a one-year growth rate of 4.1%, down from 4.3% the previous month. Wage inflation has been much higher than average for several years, reflecting the strength of employee bargaining power with employers. But wage pressure has softened over the last 18 months, slowing from a peak growth rate of 5.9% in March 2022.

Slower than expected employment growth could help soften inflation that has pressured prices since 2021. Inflation has come down significantly since the summer of 2022 when it peaked at nearly 9%. But signs of “sticky” inflation have emerged in the last few months.

After slowing to 3.1% in June, the one-year growth of the Consumer Price Index has increased to 3.7% in recent months. While goods price increases continue to return to pre-pandemic levels, inflation in the service sector remains elevated. In order to achieve the Fed’s goal of price stability, inflation needs to return back to a normal rate of around 2% for an extended period of time. 

Growth by Industry

Industries experienced mixed job growth during October. Those leading the gains were education and health services (+89,000); government (+51,000); and construction (+23,000). By contrast, the industries with the largest decline in jobs were manufacturing (-35,000); information (-9,000); and financial activities (-2,000). Private payrolls increased by 99,000, with goods-producing industries decreasing by 11,000 and service-providing industries increasing by 110,000. Of particular interest in October was the decrease of 33,200 jobs in motor vehicles and parts, which is part of the manufacturing industry.

The Bottom Line

The economy continues to normalize after the historic shocks of the covid pandemic. After many months of growth above expectations, job growth in October finally showed that the labor market is softening. This is good news to the Federal Reserve, which has been fighting to cool an overheating economy for the last two years. One month of data is not enough to indicate a trend, but if labor market pressure and price pressures continue to soften, this will give the Fed more room to maneuver.

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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economics and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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