The US labor market report points to an orderly US growth deceleration, albeit weaker-than-expected ISM figures raise downside risks
Latest data indicate a slowdown in the US economy, with ISM business surveys disappointing in September and suggesting -- apart from a sharper deceleration in manufacturing -- that other sectors are also beginning to slow (see Economics). Nevertheless, the latest US labor market report leaves room for optimism that the deceleration, despite being ongoing (and with the balance of risks tilted to the downside), is also taking place in a measured fashion, with companies continuing to add labor inputs, even at a more modest pace.
Specifically, in September, the increase in nonfarm payrolls stood at a healthy 157k, on a 3-month average basis, albeit considerably lower than the 3-year high of 245k witnessed in January 2019. Excluding government hiring, the respective reading for the private sector, was +119k, the weakest since July 2012 (see graph below). According to our estimates, monthly gains of 107k in nonfarm payrolls are the necessary levels for the unemployment rate to remain stable, based on a labor force participation rate at its current level of 63.2%.
In the event, the unemployment rate fell by 0.2 pps to a 50-year low of 3.5% in September, as (the volatile) total household employment increased by a solid 391k (this metric also includes the self-employed and agricultural workers). Notably, a broader measure of labor market slack, the U-6 unemployment rate (which includes the unemployed, part-time workers for economic reasons, and those workers marginally attached to the labor force) declined by 0.3 pps in September, to 6.9%, the lowest rate since December 2000 (-0.6 pps yoy).
In that context, wages maintain a healthy underlying trend, despite a deceleration in headline figures in September. Specifically, the annual pace of increase for average hourly earnings was 2.9% yoy versus 3.2% yoy in August. Nevertheless, the annual change in the less volatile wages of production and non-supervisory employees (82% of total -- that also have a higher propensity to consume) was little changed at a robust +3.5% yoy (+3.6% yoy previously), while high earners saw their compensation growth, declining to +0.3% yoy from +1.5% yoy.
Movements in global equity markets were closely linked to economic data releases in the past week, with weak business surveys in the US corroborating concerns that global growth continues to moderate, while positive US labor market data offered some respite on Friday. Overall, the MSCI ACWI was down 0.9% wow, despite an increase of 1% on Friday, recording high volatility intra-week, with the VIX index rising above 20% for the first time since August (see page 3). Investor attention will now turn to US-China trade talks (October 10th/11th) and the Q3 US earnings season which kicks off on October 15th, with consensus expecting negative annual growth (-3%).
At the same time, US Treasury yields fell sharply, in view of weaker GDP growth prospects and expectations for fresh monetary policy stimulus by the Fed at its meeting on October 30th. Indeed, investors now price in more aggressive rate cuts by the Fed (see graph below). Specifically, the 10-year yield declined by 15 bps wow (-116 bps ytd), to 1.53% and its 2-year peer (which is more sensitive to shifts in the expectations for the federal funds rate) by 23 bps wow (-108 bps ytd) to 1.41%, a 2-year low.