Friday's employment report is expected to show the U.S. economy added 250,000 jobs in September, with a gain of 280,000 in the private sector. That would be a big step down from the recent trend but still too hot for the Federal Reserve. Yet there's a good chance of a much softer reading that could extend this S&P 500 rally attempt a bit longer.
On Wednesday, a monthly employment report produced by payroll processor ADP showed 208,000 new private-sector jobs in September. August's gain was revised up to 185,000. Still, the combined gain of 383,000 jobs in July and August trailed the Labor Department's official measure by 392,000.
On Tuesday, new data showed that job openings tumbled 1.1 million in August to 10.053 million, helping to keep the stock market's rally mood going. After jumping 2.2% on Monday, the S&P 500 raced up 3.1% in Tuesday stock market action. However, the S&P 500 pulled back 0.5% on Wednesday afternoon.
The Fed is focused on balancing labor demand and supply. While there's still a long way to go, it's finally making progress. In August, there were 1.7 job openings per unemployed worker, down from 2.0 in July.
More evidence of softness was apparent in Tuesday's small business employment report from Paychex and IHS Markit, which showed a small year-over-year decline in payrolls of firms with fewer than 50 employees. Wage growth slipped just below 5% for the first time since April.
Jobs Report Accuracy Doubted
The private payroll data is adding to suspicions that official payroll growth has been overstated in recent months.
The monthly employment report's headline job figures, which come from a midmonth employer survey, show that the U.S. economy has added 1.9 million jobs over the past five months. However, the household survey, on which the unemployment rate is based, shows the ranks of workers rising by just 274,000 since March.
That reported five-month gap of 1.6 million payroll jobs vs. the net change in number of people working is the biggest in history outside of 2020, when Covid lockdowns temporarily killed huge numbers of nonpayroll jobs, such as gig work.
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Meanwhile, the number of people with full-time work has fallen by 383,000 over the same period, the household survey shows.
While the household survey has a higher margin of error, some economists credit it for providing a more accurate picture with respect to inflections in the job market. On top of that, Federal Reserve minutes from the July 26-27 meeting noted that data from employment processor ADP provided to the Fed "seemed to imply a softer labor market than that suggested by the still-robust growth in payroll employment."
Seasonal Adjustment Quirks
Why might government jobs reports exaggerate job growth? Inaccurate seasonal adjustment is one possible factor. Take the August jobs report. Government data showed the private sector adding 308,000 jobs adjusted for seasonality, but just 57,000 on an unadjusted basis.
The return to school in August is one factor complicating seasonal adjustments. The odd thing is that the 251,000 boost from the seasonal adjustment was nearly 200,000 more than in 2018 or 2019. Even odder: This year's survey week came in the second week of August vs. the third week in 2018 and 2019. That means summer employment should have been closer to a seasonal peak at the time of this year's August employer and household surveys.
Meanwhile, last month's household survey showed the number of employed 16- to 19-year-olds jumped an unlikely 363,000 in August, after seasonal adjustment.
August's seasonal adjustment boost has been the recent trend. Over the past five months, seasonal adjustment factors added a total of 364,000 private-sector jobs in 2022 compared to the average adjustment in 2018, 2019 and 2021.
It appears we're overdue for some payback, with a soft seasonal adjustment contributing to weaker reported job growth on Friday.
Birth-Death Adjustment
Adjustment for the birth of new firms and death of no-longer-viable ones, neither of which report data to the Labor Department, also could be well off the mark. The adjustment has added 418,000 jobs to the seasonally unadjusted job total over the past two months. That's 110,000 more than the average birth/death adjustment over the same period in 2018, 2019 and 2021.
The birth/death adjustment mostly reflects past trends. Labor Department statisticians don't attempt to take current economic conditions into account. But those conditions are hardly ideal, with interest rates surging amid the most aggressive Fed tightening cycle since the early 1980s.
Yet even if the Labor Department projections of net jobs added by the birth and death of firms is too rosy, that may not affect September's employment numbers. That's because September is typically one of the weakest months of the year for jobs in this category. The net birth-death adjustment subtracted 87,000 jobs from the seasonally unadjusted total in September 2021.
What It Means For The Fed And S&P 500
As of Tuesday morning, odds stood at 60% that the Fed will hike its key rate another 75 basis points on Nov. 2, according to CME Group's FedWatch page. That would bring the fed funds overnight lending rate to a range of 3.75% to 4%. But markets see increasing odds (now 44%) that the Fed will only hike to a range of 4%-4.25% by year-end, with perhaps just a quarter-point rate increase in December.
A soft jobs report would strengthen the case for Fed moderation and lower the risk that aggressive tightening will cause a global financial market train wreck.
Still, it's probably premature for a sustained S&P 500 rally. For one thing, a reversion of seasonal adjustment in September's report could negate much of the apparent labor force increase seen in August. That might lower the unemployment rate to 3.6% from 3.7%, underscoring labor market tightness.
More broadly, as financial markets pull back from the brink, the Fed has more leeway to keep tightening. While it's far from clear that the federal funds will peak as high as the 4.6% — signaled by Fed projections last month, policymakers are serious about holding policy tight for an extended period.
Even if the job market isn't as strong as it has appeared, there's no question that the labor market is way too tight. Getting to the other side of the current global plight of high inflation, high debt, low growth and geopolitical peril won't be a quick or fun ride.
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