Evelyn Reynolds

In normal times, strong job gains and rising wages would be considered a good thing. But these days, they’re exactly what the U.S. economy doesn’t need.
Economists surveyed by Dow Jones expect the report will show that payrolls increased 275,000 in September, while the unemployment rate held at 3.7%.
An upside surprise could mean a more aggressive Fed that could roil markets.
Along with the headline job number, investors will be watching wage growth closely.

A worker takes a panini sandwich off a grill at a restaurant in the Union Market district in Washington, D.C., on Tuesday, Aug. 30, 2022.
Al Drago | Bloomberg | Getty Images

Investors are closely watching the nonfarm payrolls report due out Friday, but not for the usual reasons.
In normal times, strong job gains and rising wages would be considered a good thing. But these days, they’re exactly what the U.S. economy doesn’t need as policymakers try to beat back an inflation problem that just won’t seem to go away.

“Bad news equals good news, good news equals bad news,” Vincent Reinhart, chief economist at Dreyfus-Mellon, said in describing investor sentiment heading into the key Bureau of Labor Statistics employment count. “Pretty much uniformly what is dominant in investors’ concerns is the Fed tightening. When they get bad news on the economy, that means the Fed is going to tighten less.”
Economists surveyed by Dow Jones expect the report, due out Friday at 8:30 a.m. ET, will show that payrolls increased 275,000 in September, while the unemployment rate held at 3.7%. At least as important, estimates are for average hourly earnings to increase 0.3% month over month and 5.1% from a year ago. The latter number would be slightly below the August report.

Any deviation above that could signal that the Federal Reserve needs to get even more aggressive on inflation, meaning higher interest rates. Lower numbers, conversely, might provide at least a glimmer of hope that cost of living increases are abating.
Wall Street forecasters were split on which way the surprise might come, with most around the consensus. Citigroup, for instance, is looking for a gain of 265,000, while Nomura expects 285,000.

In search of middle ground

For investors, the focus will be keen on what wages are saying about the state of the labor market.

Even hitting the consensus 5.1% increase means wage pressure “is still high. Markets might want to reconsider a sanguine view of what the Fed plans to do,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. “The Fed is planning an aggressive stance. A hotter wage reading would just confirm their position.”

Policymakers essentially are looking for Goldilocks — trying to find monetary policy that is restrictive enough to bring down prices while not so tight that it drags the economy into a steep recession.
Comments in recent days indicate that officials still consider slowing inflation as paramount and are willing to sacrifice economic growth to make that happen.
“I want Americans to earn more money. I want families to have more money to put food on the table. But it’s got to be consistent with a stable economy, an economy of 2% growth” in inflation, Minneapolis Fed President Neel Kashkari said Thursday during a Q&A session at a conference. “Wage growth is higher than you would expect for an economy delivering 2% inflation. So that gives me some concern.”
Likewise, Atlanta Fed President Raphael Bostic on Wednesday said he thinks the inflation battle “is likely still in the early days” and cited a still-tight labor market as evidence. Governor Lisa Cook said Thursday that she still sees inflation running too high and expects “ongoing rate hikes” to be necessary.
However, worries have shifted in the market lately over the Fed doing too much rather than too little, as some indicators in recent days have pointed to some loosening of inflation pressures.
The Institute for Supply Management on Wednesday reported that its September survey showed expectations for prices around their lowest levels since the early days of the pandemic.
Recent BLS data indicated that prices for long-distance truck deliveries fell 1.5% in August and are well off their January record peak (though still up nearly 22% from a year ago).
Finally, outplacement firm Challenger, Gray & Christmas reported Thursday that job cuts surged 46.4% in September from a month ago (though they are at their lowest year-to-date level since the firm began tracking the data in 1993). Also, the BLS reported Tuesday that job openings fell by 1.1 million in August.

Correcting a mistake

Still, the Fed is likely to keep pushing, with chances rising that the economy enters into recession if not this year then in 2023.
“The Fed’s mistake is already made i.e. not moving in advance of inflation rising. So it has to double-down if it’s going to deal with the inflation problem,” Reinhart said. “Yes, recession is inevitable. Yes, the Fed’s policy is probably going to make it worse. But the Fed’s policy mistake was earlier, not now. It’s going to catch up because of it’s previous mistake. Hence, recession is around the corner.”
Even if Friday’s number is weak, the Fed rarely reacts to a single month’s data point.
“The Fed will keep hiking until the labor market cracks. To us this means the Fed is confident that payrolls growth has slowed and unemployment is on an upward trajectory,” Meghan Swiber, rates strategist at Bank of America, said in a client note. In real terms, Swiber said that likely means no change until the economy is actually losing jobs.
There was, however, one instance where the Fed did seem to react to a single data point, or two points more specifically.
In June, the central bank was set to approve a 0.5 percentage point rate increase. But a higher-than-expected consumer price index reading, coupled with elevated inflation expectations in a consumer sentiment survey, pushed policymakers in an 11th-hour move to a 0.75 percentage point move.
That should serve as a reminder on how focused on the Fed is on pure inflation readings, with Friday’s report possibly viewed as tangential, said Shannon Saccocia, chief investment officer at SVB Private Bank.
“I don’t think the Fed is going to pivot or pause or anything of that nature before the end of the year, certainly not because of jobs data,” Saccocia said.
Next week’s CPI reading is likely to be more consequential when it comes to any shift in Fed attitudes, she added.
“Wages are embedded in the cost structure now, and that’s not going to change. They’re probably going to put more emphasis on food and housing prices in terms of their areas of interest, because all that can happen now [with wages] is we stabilize at current levels,” Saccocia said. “Any sort of lift we got out of this print [Friday] is likely to be temporary, and tempered by the perception that this is all really about CPI.”

WATCH LIVEWATCH IN THE APP More

Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August, according to ADP.
Trade, transportation and utilities saw a jobs gain of 147,000, while professional and business services and education and health services also posted large increases.

The U.S. labor market showed strength in September, with private companies adding more jobs than expected, payroll services firm ADP reported Wednesday.
Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August.

Those gains came even as goods-producing industries reported a loss of 29,000 positions, with manufacturing down 13,000 and natural resources and mining losing 16,000.
However, a big jump in trade, transportation and utilities helped offset those losses, as the sector saw a jobs gain of 147,000.
Professional and business services added 57,000, while education and health services picked up 38,000 and leisure and hospitality grew by 31,000. There also were losers within the services sector, as information declined by 19,000 and financial activities saw a loss of 16,000 positions.
By size, companies employing 50-499 workers led with a 90,000 gain, while large firms added 60,000 and small businesses contributed 58,000.

The tight job market saw another month of sizeable pay hikes, with annual pay trending up 7.8% from a year ago, according to ADP, which compiles the report in tandem with the Stanford Digital Economy Lab. Those changing jobs saw a median change in annual pay of 15.7%, down from 16.2% in August for the biggest monthly drop in the three years ADP has been tracking the data.

ADP’s report comes two days before the closely watched nonfarm payrolls report issued by the Bureau of Labor Statistics.
The estimate for the Friday report is a growth of 275,000 jobs. Though ADP revised its methodology over the summer, the August total, which was revised up sharply from the originally reported 132,000, was still well shy of the BLS count of 315,000 added jobs.
Federal Reserve officials are watching the jobs numbers closely as the central bank looks to stem high inflation.

WATCH LIVEWATCH IN THE APP More

The consequences for the Fed not bringing inflation under control could be severe. Unemployment could spiral with the lowest earners sustaining the biggest impact.
Economist Joseph Brusuelas said a worst-case scenario would look something like a 5.5% unemployment rate and 3.5 million jobs lost.
That the Fed goes too far and stifles the economy too much is the principal fear of the central bank’s critics.
“I really think the war on inflation has been won. We just don’t know it,” said Leuthold Group strategist James Paulsen.

Jerome Powell, chairman of the US Federal Reserve, speaks during a Fed Listens event in Washington, D.C., US, on Friday, Sept. 23, 2022. Federal Reserve officials this week gave their clearest signal yet that they’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation.
Al Drago | Bloomberg | Getty Images

Think of Federal Reserve Chairman Jerome Powell as a gymnast sprinting across the mat, spiraling, turning, churning, then twisting through the air and trying to make sure he still lands perfectly on his feet.
That’s monetary policy in this era of rapid inflation, swooning economic growth and heightened fears over what could go wrong. Powell is that gymnast, standing on the economic version of an Olympic mat, and having to make sure everything goes right.

related investing news

Because if things go wrong, they could go very wrong.
“They have to stick the landing,” said Joseph Brusuelas, U.S. chief economist at RSM.. “It’s the lower end of the economic ladder that is going to bear the burden if the Fed doesn’t stick the landing correctly. They lose jobs and their spending goes down and they have to draw on savings and 401(k)s to make ends meet.”
Consumers pressured by consistently rising prices already are dipping into savings to cover costs.
The personal saving rate was just 3.5% in August, according to the Bureau of Economic Analysis. That was just above a 3% rate in June that was the lowest in 14 years, dating back to the early days of the financial crisis.

Prices for everyday items have been surging at an extraordinary clip. Eggs were up 40% from a year ago in August, butter and margarine soared nearly 30% and gasoline, even with a 10.6% decline in the month, was still more than 25% higher than the same point in 2021.

The consequences for not bringing that under control could be severe, just as they could be if the Fed goes too far in its quest to regain price stability for the U.S. economy.
Brusuelas said a worst-case scenario would look something like a 5.5% unemployment rate and 3.5 million jobs lost as companies have to lay off workers to deal with the economic deceleration and surging costs that would come should inflation run rampant.

The risk of failure

As it stands, the economy is quite likely headed for a recession anyway. The question is how much worse it can end up.
“It’s not a matter of are we going into recession or not, it’s when we’re going to have it and the degree of intensity of the recession,” Brusuelas said. “My sense is we’re in a recession by the second quarter of 2023.”
The Fed cannot just keep raising rates as the economy weakens. It must hike until it reaches an equilibrium where it slows down the economy enough to correct the multifaceted supply/demand mismatches but not so much that it causes deeper, unnecessary pain. According to the Fed’s most recent outlook, policymakers expect to keep going into 2023, with benchmark rates about 1.5 percentage points from the current level.
“If the Fed overdoes it, you’ll have a much deeper recession with higher unemployment,” Brusuelas said.
That the Fed goes too far and stifles the economy too much is the principal fear of the central bank’s critics.
They say there are tangible signs that the 3 percentage points of rate hikes so far in 2022 have accomplished their goal, and the Fed now can pause to let inflation recede and the economy recover, albeit slowly.

“The Fed could quit today and inflation’s going to be back to acceptable levels next spring,” said James Paulsen, chief investment strategist at The Leuthold Group. “I really think the war on inflation has been won. We just don’t know it.”
Paulsen looks at things such as falling prices for commodities, used cars and imported goods. He also said prices on technology-related items are declining, while retail inventories are rising.
On the jobs market, he said the balance of payroll growth this year has come from the supply side of the economy that the Fed wants to stimulate, rather than the demand side that fueled the inflation explosion.
“If they want to, they can cause a needless recession,” Paulsen said. “I just don’t know why they want to do that.”
Paulsen is not alone in his criticism. There are spreading calls around Wall Street for the central bank to dial down its policy tightening and watch how the economy progresses from here.
Wells Fargo head of equity strategy Christopher Harvey said the Fed’s messaging, particularly from Chairman Jerome Powell, that it is willing to inflict “some pain” on the economy is being interpreted as the central bank willing to keep going “until something breaks.”
“What is troubling is the apparent downplaying of capital market signals as the Fed trudges toward its 2% inflation target,” Harvey said in a client note. “Therefore, those signals will need to get louder (i.e. even lower equities and wider spreads) before the Fed reacts. This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate.”

Human costs

No less an authority than the United Nations issued an agency report Monday in which the UN Conference on Trade and Development warned of the ramifications that the rate hikes could have globally.
“The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course,” UNCTAD Secretary-General Rebeca Grynspan told a news conference in Geneva, according to a Reuters account.
Yet the data suggest the Fed still has work to do.
The upcoming consumer price index report is expected to show that the cost of living continued to climb in September. The Cleveland Fed’s Nowcast tracker of the items in the broad-based basket of goods and services the Bureau of Labor Statistics uses to compute the CPI is showing another 0.5% gain excluding food and energy, good for a 6.6% year over year pace. Including food and energy, headline CPI is projecting to rise 0.3% and 8.2% respectively.
While critics argue that those kinds of data points are backward-looking, the Fed faces an added optics issue after it downplayed inflation when it first started rising significantly more than a year ago, and was late to act.

That puts the burden back on policymakers to keep tightening to avoid a scenario like the 1970s and early ’80s, when then-Chairman Paul Volcker had to drag the economy into a tough recession to stop inflation once and for all.
“This is not the ’70s by any stretch of the imagination, for a whole lot of reasons,” said Steve Blitz, chief economist at TS Lombard. “But I would argue that they’re still being overly optimistic at which the inflation rate is going to decelerate on its own.”
For their part, Fed officials have stuck to the company line that they are willing to do whatever it takes to halt price surges.
San Francisco Fed President Mary Daly spoke emphatically about the human consequences of inflation, telling an audience Tuesday that she has been hearing about it from her constituents.
“Right now, the pain that I hear, the suffering that people are telling me what they’re going through, is on the inflation side,” she said during a talk at the Council on Foreign Relations. “They’re worried about their day-to-day living.”
Specifically addressing the wage issue, Daly said she one person told her, “I’m running fast and falling behind every single day. I’m working as hard as I can and I’m falling further behind.”

WATCH LIVEWATCH IN THE APP More

Job openings in August totaled 10.05 million, a 10% drop from the 11.17 million reported in July and more than a million less than expected.
The Job Openings and Labor Turnover numbers are watched closely by the Federal Reserve, which is trying to reverse runaway inflation that has been pushed by the tight labor market.

The number of job openings plunged by more than a million in August, providing a potential early sign that the massive U.S. labor gap is beginning to close.
Available positions totaled 10.05 million for the month, a 10% drop from the 11.17 million reported in July, according to a Bureau of Labor Statistics release Tuesday. That was also well below the 11.1 million FactSet estimate and was the biggest one-month decline since April 2020 in the early days of the Covid pandemic.

The number of hires rose slightly, while total separations jumped by 182,000. Quits, or those who left their jobs voluntarily, rose by 100,000 for the month to 4.16 million.
The Job Openings and Labor Turnover numbers are watched closely by the Federal Reserve, which is trying to reverse runaway inflation through a series of five interest rate increases this year that thus far have totaled 3 percentage points.
One primary area of interest for the central bank has been the ultra-tight labor market, which had been showing about two job openings for every available worker. That ratio contracted to 1.67 to 1 in August.
The job market has been a primary driver of inflation, as the outsized demand for the scarce labor pool has helped drive up wages sharply. Average hourly earnings rose 5.2% over the 12-month period through August. But adjusted for inflation, real earnings actually declined 2.8%.
“Job openings took a major dive in August, falling by more than about 1 million, but they still total more than 10 million. That and other data point to a jobs market that’s still challenging for employers,” said Robert Frick, corporate economist at Navy Federal Credit Union. “But judging by the drop in openings and the high number of Americans who entered the labor force in August, almost 900,000, the worst of the tight labor market is over.”

Health care and social assistance saw the biggest drop in vacancies, falling by 236,000. The “other services” category saw a decline of 183,000, while retail was down 143,000.
Aligning labor supply with demand has been a big goal for the Fed, which uses rate increases to slow the flow of money through the economy. The labor market has shown little reaction to the moves, with weekly jobless claims recently hitting a five-month low and the unemployment rate at 3.7%.
August did see a sharp bump in the labor force, which increased by 786,000, pushing up the participation rate by 0.3 percentage point to 62.4%, tied for highest of the year. The rate remains one full percentage point below where it was in February 2020, just prior to the pandemic.
Markets still expect the Fed to push forward with a fourth consecutive 0.75 percentage point interest rate hike at its next meeting.
Tuesday’s release comes ahead of Friday’s nonfarm payrolls report for September, which is expected to show a gain of 275,000, according to Dow Jones.

WATCH LIVEWATCH IN THE APP More