Labor Market Slows But The Recovery Is Still Strong

Job Gains Slow But Remain Well Above Pre-COVID Levels

The September Labor Situation Report, AKA the non-farm payroll report, came in a bit weak and is weighing on market confidence. With the pace of new job creation slowing the health of the economic recovery is in question. While there is undoubtedly still weakness within the labor market it is isolated, spotty, and more the result of turnover than economic weakness. Some industries are hurting, some are failing, but others are thriving. The bottom line is that the labor market,the consumer, and the economy are still resilient and strong.

Job Creations Slows, But It’s All Relative

The non-farm payrolls report came in at 661,000 for the month of September as job creation slows for the 4th month. While job creation is slowing, investors need to remember that 661,000 net new jobs are still more than in any month in pre-COVID times EVER. That’s a lot of new jobs and puts us on pace to see solid GDP growth for the foreseeable future. I know that everywhere I go I see help-wanted signs, just like before the pandemic struck. The only risk would be if there was another shut-down but that seems to be only a very distant possibility. Add in the 145,000 and the figure looks even better.

Other data within the report is equally encouraging. The number of unemployed fell by 0.50% to hit a post-COVID low while wages held steady. The only negative is that we’ve only recovered about half the jobs lost when COVID struck but there are mitigating factors to that data. First, the pace of job creation is still robust and comes with a tailwind in the form of upward revisions. Next month’s data is sure to be revised again and all other signs point to rising strength within the economy.

The second is hiring. The number of newly announced intentions to hire hit a new record in September. According to data from Challenger, Gray & Christmas, there were 929,860 announced plans to hire last month. That is the highest level for the year and of any month on record, ever. It is also more than double the September average and puts the 2020 YTD total more than double the previous full-year record. 

The third is the Kanas City Federal Reserves Index of Labor Market Conditions. The index is a composite of the 24 labor market indicators used by the FOMC. It still shows activity trending below previous levels but rising and momentum is well above any previous all-time high. Momentum is driven by a combination of factors including job creation, aggregate hours worked, wages, and the expectation of job availability. Looking at the JOLTs report job availability is good. The number of open jobs is running about 6.6 million, down from 7.0 at the beginning of the year but well above the low 4.9 million set back in April. An unemployed person may not find the job they had but there is a job out there.

Expect Wicked GDP Growth In The 3rd And 4th Quarter

The consensus target for the 3rd quarter GDP growth has only risen since the quarter began. Starting at a robust 12%, the Atlanta Fed’s GDPNow tracking tool is now calling for a 34% increase in GDP for the quarter. That’s not enough to bring the economy back to where it was before the pandemic struck, but it is enough to recover most of the losses and put the country on track for continued expansion in the following quarters. Considering that the 2nd quarter GDP saw two upward revisions and there is other evidence of momentum in the economy I expect the tool to continue tracking higher.

With that in mind, the recent weakness in the S&P 500 looks more like a pullback than the start of a reversal. Trump’s case of COVID has added a new element of risk to the market but the indications are still positive. The next hurdle for the market will be the 3,400 mark. With the 3Q earnings cycle about to get underway, it is the most likely catalyst short of a new stimulus deal between Pelosi and Mnuchin.