Unpacking September's unexpectedly robust jobs report

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Phoebe White: Welcome to Research Recap on J.P. Morgan's Making Sense podcast channel. I'm Phoebe White, Head of U.S. Inflation Market Strategy at J.P. Morgan. And today, I'm joined by Mike Feroli, our Chief U.S. Economist, and we're here to discuss takeaways from the September U.S. employment report, as well as the path ahead for the economy and the Fed. Mike, thanks so much for joining.

Mike Feroli: Thanks, for having me.

Phoebe White: So there's a lot of good news this morning. Can you just walk us through your takeaways?

Mike Feroli: Yeah, so most of the major metrics we saw today beat expectations, and beat them quite handily. Job growth up 254,000, which is more than double the three month average going into August. You had unemployment rate moved down from 4.2% to 4.1%, almost rounded down to 4.0%. Average hourly earnings growth was a tick stronger than expectations. The only soft part was the workweek, which moved down. But overall, a report that generally came in, as I said, quite a bit better than expectations.

Phoebe White: So let's talk about just that headline jobs number. And I think what's also interesting is in the last few months, we've been seeing prior months getting revised down. This month that came with an upward revision to prior months. And again, we're looking at a three month run rate now close to 185,000. So how are you thinking about just the trend in labor demand right now?

Mike Feroli: Yeah, so it definitely looks better now. You obviously don't want any report to completely change your worldview. If anything, this probably aligns the jobs data a little better with the aggregate expenditure data, where up until today, GDP growth had been looking quite a bit stronger than the labor market data. Now, they're both kind of coming back better into alignment right now.

Phoebe White: So let's dig into that a little bit and just the spending side of things. Again, payroll growth, not softening as quickly as we thought perhaps, but also, average hourly earnings coming in a bit hotter. The year ago rate back up to 4%. So does that help to explain just kind of the strength in consumer spending? And how are you thinking about the health of the consumer in light of that labor income?

Mike Feroli: So overall, it looks solid. In the third quarter, labor income grew, nominal labor income grew at a 4.4% pace, which is actually the lowest of the expansion. But still, by the standards of the prior expansion, is a solid number, particularly in an environment in which, well, until this week, energy prices and overall headline inflation have been looking a little lower. So the consumer, we think, still looks fine, particularly after those upward revisions we saw to the saving rate. There's no reason to think that the consumer is particularly fragile right now. So we would expect consumer spending to continue to hum along here pretty nicely.

Phoebe White: So just putting things together, and again, we can't know for sure with one report, but do you feel like the signal now is maybe that growth is stabilizing, or do you think there's still enough data that's pointing to slowing here into the fourth quarter?

Mike Feroli: We think we're still probably slowing into the fourth quarter, into early next year, though that slowdown, obviously, looks a little less worrisome than it did before today's report. So I wouldn't be quite as concerned that we could have a hard landing here. But overall, we think the trend is still modest slowing.

Phoebe White: OK. And then from the perspective of just kind of labor market slack and what that could mean for price pressures, we talked about average hourly earnings, but the U-rate moving back down to 4.05%, as you mentioned. Can you just talk about the components of the household survey that contributed to that move? How should we be thinking about the participation rate and the flows and things like that?

Mike Feroli: Well, basically everything looked better in the household survey. So you had declines in the number of unemployed who were job losers, job leavers, new entrants, re-entrants. It was really quite across the board. The participation rate was stable, and the overall employment to population ratio ticked up two ticks. So generally, it's a healthier picture than what we had seen last month. And again, you're still up 7/10 from the low on U-rate, so you do still see, broadly speaking, better balanced than you did a year ago. But I think the concern that we may be slipping in the manner of like the Sahm rule or something like that seems a little less compelling after this morning.

Phoebe White: So let's talk about what this means for the Fed. Clearly, we still have an inflation report before the next meeting. We have another employment report. How much does that inflation report matter and just how will the Fed be thinking about risks heading into that next meeting?

Mike Feroli: So right now, it seems like the incumbent move would be 25 basis points, particularly not only today's number coming in stronger, taking out the need or the case for 50s. But also, we heard from Chair Powell earlier this week that sounds like they would prefer to stay on that path that was laid out in the dot plot, which presumably has 25s. The CPI report will matter. The next jobs report should also matter. It's kind of tricky because it's going to come in the blackout period. So it'd have to be, I think, a real big surprise one way or the other to move us off the path of what seems to be a pretty clear cut case for 25 as of today.

Phoebe White: And in terms of describing the risks, I mean, there's been sort of a shift in tone the last couple of months, in terms of saying that there was less upside risk to inflation and there was more concern on the labor market side. Does this kind of shift the way they're talking about the risk balance?

Mike Feroli: You know, I would think before today, the risks were less inflation and kind of growing concerns about employment. Clearly, this should ease some of those concerns about employment, again, which I think probably helps the case for the 25s as a more gradual move back toward normalization.

Phoebe White: Right, and it begs the question of what the path of the Fed beyond even November will look like. And we've had a pretty swift repricing in markets here the last few weeks. Two year yields are up nearly 40 basis points from just about a week and a half ago. Markets are still priced for a terminal Fed funds rate, pretty close to 3%. Again, it's moved up around 3.13%. We were well below 3 previously. But just how are you thinking about the path of the Fed into 2025?

Mike Feroli: We anticipate 25s until you get back to something close to neutral, which our view is similar to the Fed's view there, around 3%. I think after December, the picture obviously becomes a lot murkier because policy uncertainty, sitting here today, is pretty elevated, right? So we don't know a lot of the issues that we're going to be facing after the election, nor does the Fed. So I think it's easier to say, how the remainder of the year shakes out. And then I think as we get into next year, we have a forecast, but there's a lot of uncertainty around that forecast.

Phoebe White: Right. And I think we'll have a lot to talk about next month. We'll save the election discussion for next podcast. But I think we'll leave it there today. Mike, thanks again for joining.

Mike Feroli: Thank you.

Phoebe White: And thanks to our listeners for tuning in. We hope you'll join us again next month. For more research insights, visit jpmorgan.com/research.

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