After tonight's non-farm payroll report, US employment data will become even more chaotic!

The U.S. September non-farm payroll report will be released tonight at 8:30 p.m., expected to show a slight slowdown in the U.S. labor market, but still robust. While maintaining the status quo is often not the most exciting state, further signs of stability may be a good sign for the overall economy and the Federal Reserve. After starting a rate cut cycle with a 50 basis point cut, the Federal Reserve is closely watching whether the slowdown in the labor market will evolve into a full-blown economic recession.

"The next two employment reports are crucial in shaping the Fed's policy decision in November," Lydia Boussour, senior economist at EY-Parthenon, wrote in a report on Wednesday.

While September employment data is expected to be relatively stable, October's employment report may not be. The report will be released on November 1, just a few days before the presidential election. The data at that time may be severely distorted by three major disruptions: the destruction caused by Hurricane Helen, the ongoing strike by Boeing technicians, and the large-scale port strikes along the U.S. East Coast and Gulf of Mexico.

"These strikes and hurricane-related impacts will not permanently alter the trajectory of the labor market; but September may be the last 'clean' labor market data we see for a while," said Ryan Sweet, chief economist at Oxford Economics. "If the Boeing strike and port strikes continue into the non-farm reference period on October 12, they will reduce employment data." He added, "Combined with the impact of Hurricane Helen, October's employment data may show a decline."

Although the reasons are temporary, the U.S. has not seen negative job growth since December 2020, when the job market was still affected by the COVID-19 pandemic.

Expectations for Friday's Report

The U.S. labor market has been cooling down for some time, gradually rebalancing, while also being influenced by aggressive rate hikes to combat soaring inflation.

Looking back at the data from previous months, the July report's employment data fell below expectations (only adding 114,000 jobs that month, later revised down to 89,000), coupled with a significant downward revision to annual data through March 2024, exposing the pain points of the labor market and triggering concerns of its collapse among analysts and traders. The August employment report showed better-than-expected job growth, adding 142,000 jobs, with a slight decrease in the unemployment rate, greatly alleviating these concerns.

The September report may have a similar effect: economists predict the U.S. added 140,000 jobs in September, with the unemployment rate remaining at 4.2%, according to FactSet.

"The labor market is currently quite strong," said Erica Groshen, former commissioner of the U.S. Bureau of Labor Statistics and senior economics advisor at Cornell University's School of Industrial and Labor Relations. "Compared to the peak period a few months ago, the labor market has slightly eased," she added

"The unemployment rate remains very low. Employment growth may approach sustainable levels."

Labor Market Shows Resilience, Yet "Fragile"

Economists have been emphasizing the solid fundamentals of the labor market. They have pointed out the high employment-to-population ratio, labor force participation rate, number of job openings, strong consumer spending, productivity, and corporate balance sheets, especially the low layoff levels.

New data released on Thursday showed a slight decrease in layoffs in September. According to data from Challenger, Gray & Christmas, employers announced layoffs of 72,821 people last month, a 4% decrease from August. However, compared to the same period last year, layoffs in September still increased by 53%.

Initial claims for unemployment benefits, as an alternative indicator for layoffs, have increased over the past year but remained stable overall. According to data released by the Department of Labor on Thursday, the number of initial claims for unemployment benefits increased from 219,000 to 225,000 last week. Economists at Pantheon Macroeconomics wrote in an investor report on Wednesday that this increase was expected, partly due to Boeing's adoption of a "furlough" system to cope with a long-term strike.

"We are at a turning point now, where the labor market may stagnate or tighten again," said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, in a statement.

"The impact of lower interest rates on employer costs and consumer savings accounts may take a few months to show. Consumer spending is expected to increase, which could lead to increased labor demand in industries facing consumers."

This "wait-and-see attitude" was also reflected in the Job Openings and Labor Turnover Survey report released earlier this week by the Bureau of Labor Statistics. Despite an increase in job openings in August, recruitment activities remained weak: post-pandemic, the ratio of recruitment to overall employment is similar to that during and after the Great Recession.

Similarly, except during the pandemic, the quit rate is at its lowest level since 2015. Economists at Wells Fargo wrote in a report released on Tuesday, indicating that the job market is in a "stagnant state." "Numerically, the U.S. labor market is still holding up, but it is in a fragile position," they wrote.

"Beneath the surface, labor market fluidity (i.e., new hires and employee quits) has fallen back to levels seen in the early to mid-2010s."

The good news is that layoffs and discharges remain at historically low levels. However, they added that layoffs and other separations "need to remain low to avoid a significant slowdown in net hiring," especially against the backdrop of weak demand for new workers.

The Confused Situation Becomes More Uncertain

Further monetary policy easing may once again drive improvements, but the recent 50 basis point rate cut by the Federal Reserve will take time to transmit into the economy. Noah Yosif, Chief Economist at the American Hiring Association, stated, "Just because the Fed decided to lower rates in September does not mean employers will see cost reductions in October." He said, adding that it may take three to six months for this to transmit to businesses.

More rate cuts are expected later this year, but the magnitude will depend on the health of the labor market, and the outlook may be very uncertain due to the impact of strikes and Hurricane Helen. Ryan Sweet of Oxford Economics said, Fed officials will make rate decisions a few days after the release of the October non-farm payrolls report, trying to eliminate noise and incidental factors to make judgments.

The longer the strike lasts or the longer it takes to return to work, the greater the impact on the labor market and the economy from the chain reaction, said Ejindu Ume, associate professor of economics at the University of Miami.

"We have seen a mix of weakness and strength in the labor market, but these new developments may bring more risks to the system: the risk of more layoffs, the risk of continued rise in the unemployment rate," Ume said in an interview.

"This makes the Fed's job even more difficult."