September Labor Report Comes in Stronger Than Expected as Services Activity Also Jumps

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Key Takeaways:

• Nonfarm payroll employment increased by 254,000 in September, according to the Bureau of Labor Statistics (BLS). In addition, the July and August reports were revised upward by a combined 72,000. Job gains were fairly broad-based, with employment in restaurants and bars (+69,000) and health care (+45,000) the top categories. Average hourly earnings increased 0.4 percent over the month and were up 4.0 percent compared to a year prior, an acceleration from the prior three months. The unemployment rate ticked down one-tenth to 4.1 percent, a three-month low.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings rose by 329,000 to 8.04 million in August, though this was more than offset by a significant downward revision to prior months, according to the BLS. Layoffs and discharges pulled back to 1.6 million, about 100,000 fewer than in July. The quits rate, which has historically been correlated with wage growth, declined one-tenth to 1.9 percent, four-tenths below its pre-pandemic level.
• The Institute for Supply Management (ISM) Manufacturing Index was flat at 47.2, indicating ongoing contraction. The new orders index rose by 1.5 points to a still-weak reading of 46.1, while the production index rose 5 points to 49.8. The employment index declined 2.1 points to 43.9.
• The ISM Services Index jumped 3.4 points to 54.9, a 19-month high. The business activity index rose 6.6 points to 59.9, and the new orders index was up 6.4 points to 59.4. Despite this, the employment index declined 2.1 points to a contractionary level of 48.1.
• Light vehicle sales rose 6.2 percent to a seasonally adjusted annualized rate of 16.1 million in September, according to Autodata. This reverses last month's decline but remains at a subdued level relative to pre-pandemic sales.
• Private residential construction spending declined 0.3 percent in August, according to the Census Bureau. Spending on single-family construction was down 1.5 percent, while multifamily spending declined 0.4 percent. Expenditures on improvements rose 1.0 percent.

Forecast Impact:

The September labor report was a strong one all around. After concern that the labor market was slowing too quickly when unemployment hit 4.3 percent in July, two stronger labor reports in a row have largely assuaged those fears. While wage growth is currently a bit hotter than what would likely be consistent with 2-percent inflation in the long run, recent inflation reports do not suggest that wages are currently putting undue pressure on prices. Markets now strongly favor a 25-basis point rate cut in November instead of 50, in line with our forecast.

While manufacturing activity continues to struggle, the sharp increase in the ISM Services Index indicates that this much-larger part of the economy remains on solid footing. Additionally, the increase in car sales, while still at a somewhat suppressed level, suggests that consumer spending remains solid. Given the recent decline in interest rates, car sales could pick up further in coming months. On balance, and combined with previous upward revisions to aggregate personal income, risks to our growth forecast are currently weighted to the upside.

Nathaniel Drake
Economic and Strategic Research Group
October 4, 2024

Opinions, analyses, estimates, forecasts, beliefs, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, beliefs, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, beliefs, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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