What September Jobs Tell—and Don’t Tell—Investors

According to the US Bureau of Labor Statistics (BLS), nonfarm payrolls added 194,000 jobs last month while the unemployment rate fell to 4.8% from August’s 5.2%.^[i] In a vacuum, September’s numbers look just fine: jobs up, unemployment down. Yet disappointment dominated most coverage, with many pundits arguing the smallest monthly job gain since December 2020 showed the Delta variant’s harmful economic impact. In our view, that is a bridge too far. Backward-looking jobs data won’t reveal much about the economy’s health today, let alone its future direction—worthwhile perspective for investors to keep in mind, in our view.

For one, the latest jobs numbers may not be as weak as they appear. Government jobs were the biggest detractor in September, falling -123,000 m/m.^[ii] The education sector drove the drop, as public school jobs fell by -144,000 m/m.^[iii] However, this doesn’t mean schools laid off staff and faculty in droves—rather, these numbers reflect seasonal adjustments. Since many economic data series fluctuate depending on the time of year, reporting agencies apply adjustments to account for expected skew, making it easier to do month-to-month comparisons.

As the BLS noted, “Most back-to-school hiring typically occurs in September. Hiring this September was lower than usual, resulting in a decline after seasonal adjustment. Recent employment changes are challenging to interpret, as pandemic-related staffing fluctuations in public and private education have distorted the normal seasonal hiring and layoff patterns.”^[iv] Reopening schools did hire people in September—public school jobs rose by 718,000 m/m on a non-seasonally adjusted basis—just not as many as they would have in a typical year.^[v]

Beyond calculation quirks, we saw many pundits cite September’s jobs report as evidence of the Delta variant’s hamstringing the economic recovery. Many focused on the labor-force participation rate—the percentage of the population either working or looking for work—as proof many workers haven’t rejoined the workforce due to COVID-related factors, including burnout, childcare, fear of the virus and living off savings and/or government benefits. September’s rate was 61.6%, a notch down from August’s 61.7%. While up from April 2020’s pandemic low of 60.2%, it remains noticeably below January 2020’s pre-lockdown 63.4%.^[vi]

Though some analysts worry low labor force participation robs the economy of workers to drive growth, we think it is premature to declare anything here a new normal. Yes, a lack of workers can be a headwind if it means businesses can’t keep up with demand, but companies have ways to address labor shortages. For example, they can raise wages to attract workers. Besides anecdotal evidence—see fast food restaurants and warehouses offering $1,000 signing bonuses—average hourly earnings have risen six straight months.^[vii] While wage data can vary widely across different industries, the BLS suggested the large month-on-month earnings increases since March were tied at least partially to rising labor demand.^[viii] In addition to hiring more workers, businesses can also find productivity gains elsewhere—e.g., investing in automation and robots. These technologies aren’t a quick fix, but the pandemic has accelerated the longer-running automation trend, particularly in shipping and hospitality. Investment in new technologies to improve productivity amid a labor shortage also adds to economic growth.

The other common reaction to September’s jobs report: Will the weak hiring numbers influence the Fed’s decision making? Many pundits argue the Fed is in a tricky spot given its dual mandate of balancing maximum employment and price stability. Weak labor force participation, they argue, means true unemployment is higher than the headline rate indicates, while inflation rates are elevated. Although this camp seems to be shrinking, some still think the Fed’s “accommodative” monetary policy is supporting a fragile economy, and they presume removing that crutch prematurely will stifle the recovery, which could hurt jobs. Yet another, growing group frets the Fed risks letting inflation run away if they don’t tighten.

In our view, though, this presumes the Fed alone is responsible for both propping up the economy and determining prices’ direction—vastly overstating central bankers’ powers. As we have written frequently, the Fed’s quantitative easing (QE) program is an economic sedative since it flattens the yield curve, discouraging banks from lending. In our view, the Fed’s efforts have been more a minor headwind on the recovery, not a boost. Ending the program could channel more capital to businesses, giving them more firepower to address the labor shortage. Then too, people regularly overrate monetary policy’s importance to the economy. It is one small driver, not the be-all and end-all, in our view.

We think the most striking part of September’s jobs report is what it says about sentiment. The reaction seems to reflect the pessimism we have seen since volatility stirred last month. Many seem convinced the economic recovery will be a grind—chatter of strong, post-pandemic growth is gone. However, that isn’t bad for stocks, which don’t require fast growth to rise. What matters more: how expectations align with reality. Those expectations seem pretty low right now, giving reality a low bar to clear. That is bullish, in our view, as even an ok outcome could produce the positive surprise that drives stocks up the proverbial wall of worry.