A tale of two jobs markets

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September’s hotly anticipated jobs data ended up cooling markets on Friday. Stocks fell sharply as investors evaluated the report, which showed more jobs than expected were added to the US economy and indicated that more pain-inflicting interest rate hikes from the Federal Reserve lie ahead.

But a breakdown of the numbers shows that the Fed’s plans to weaken the labor market to fight persistent inflation may already be working, just not for everybody.

White-collar office workers appear to be feeling the brunt of the Fed’s actions: The financial and business sector saw a large decline in employment last month. Legal and advertising services also experienced drops. Service and construction workers, meanwhile, are still thriving.

What’s happening: The US economy added 263,000 jobs in September, higher than analyst estimates of 250,000. The unemployment rate came in at 3.5%, down from 3.7% in August.

Leading the gain in jobs was the leisure and hospitality industry, which added 83,000 jobs in September — and employment in food services and drinking places made up 60,000 of those jobs alone. Manufacturing and construction also came in hot, adding 22,000 and 19,000 jobs, respectively.

The largest non-governmental losses in jobs came from the financial industry, which shed 8,000 between August and September. Large banks hire in cycles, extending offers to recent graduates in the early fall months. That makes this September’s drop particularly significant.

Business support services — such as telemarketing, accounting and administrative and clerical jobs — are also bleeding jobs. The sector lost 12,000 in September. Meanwhile, legal services lost 5,000 jobs, and advertising services also dropped 5,000 jobs.

What it means: The Federal Reserve’s hawkish policy appears to be cooling certain parts of the economy, but not others. Finance workers are likely beginning to worry as their industry depends on stock and lending markets which have been particularly hard hit by Fed actions.

Friday’s numbers indicate that we’re beginning to see that impact in the employment data.

What remains to be seen is whether the Fed can cool the economy just by loosening employment in white-collar industries or if these losses will trickle down to other industries, hurting lower-income workers.

Coming up: Earnings season begins in earnest this week with big banks like JPMorgan, Citigroup
(C), Morgan Stanley
(MS) and BlackRock
(BLK) reporting. Investors will be watching closely for any guidance on hiring and layoff plans.

Two key inflation indicators, PPI and CPI are also set to be released. Expect markets to react poorly if inflation comes in hot.

Bad news ahead

A panel of top US economists just released its economic outlook for the next year, and it’s not great.

The panel of 45 forecasters, led by the National Association for Business Economics (NABE), said they expected slower growth, higher inflation, higher interest rates, and weakening employment in both 2022 and 2023 than they previously expected.

Most of the worries come down to the Federal Reserve’s interest rate policy.

“More than three-quarters of respondents believe the odds are 50-50 or less that the economy will achieve a ‘soft landing’,” said NABE Vice President Julia Coronado. “More than half the panelists indicate that the greatest downside risk to the U.S. economic outlook is too much monetary tightness.”

NABE panelists downgraded their median forecast for real GDP for the fourth quarter of 2022 to a 0.1% increase, compared to a 1.8% increase in the May 2022 survey. The vast majority of respondents placed more than a 25% probability of a recession occurring in 2023, with the most likely start date in the first quarter.

The latest report comes as a growing number of economists are predicting that recession is imminent. Former US Treasury Secretary Larry Summers told CNN on Thursday that it’s “more likely than not” the US will enter a recession, calling it a consequence of the “excesses the economy has been through.”

A return to the office

Friday’s jobs report showed that the share of workers telecommuting or working from home because of the pandemic ticked lower — falling to just 5.2% in September from 6.5% in August.

Fully remote work in the United States, which many predicted would remain the norm long after the pandemic, appears to be edging away, especially as the job market loosens for white collar workers and employees have less leverage.

Last week, a KPMG survey of US-based CEOs found that two-thirds believed in-office work would be the norm within the next three years.

Still, it may not be enough to help an ailing commercial real estate market, where the outlook is dire. New York City office properties declined by nearly 45% in value in 2020 and are forecast to remain 39% below their pre-pandemic levels long-term as hybrid policies continue, according to a recent study from the National Bureau of Economic Research.

Looking forward: The Bureau of Labor Statistics has noted that while hybrid work may still be popular, Covid-19 is no longer fueling work from home trends. The October report will rephrase its telework questions to remove references to the pandemic.

Since May 2020, each jobs report has asked: “At any time in the last four weeks, did you telework or work at home for pay because of the Coronavirus pandemic?”

In May 2020, 35.4% answered yes.

Starting next month, the question will be revised. “At any time in the last week did you telework or work at home for pay?” it will ask, limiting the timeline and eliminating any reference to the pandemic.

Up next

The US bond market is closed for Columbus Day/Indigenous Peoples’ Day.

Coming later this week:

▸ Third quarter earnings season begins. Expect reports from big banks like JPMorgan Chase
(JPM), Wells Fargo
(WFC), Citigroup
(C), Morgan Stanley
(PNC) and US Bancorp
(USB) and consumer staples like Pepsi
(PEP), Walgreen
(WBA)s and Domino’s

▸ CPI and PPI, two closely watched measures of inflation in the US are also due to be released. 

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