Labor Market Shows Early Signs of Slowing as Demand for Goods Weakens

Key Takeaways:

• Nonfarm payroll employment rose by 263,000 in September, slowing modestly from the 315,000 job gains in August, according to the Bureau of Labor Statistics (BLS). Jobs in leisure and hospitality were up 83,000, and the health care sector added 60,000 workers. The unemployment rate declined by two-tenths to 3.5 percent, in part due to the labor force participation rate declining by one-tenth to 62.3 percent. Average hourly earnings increased 0.3 percent over the month for the second consecutive month and were up 5.0 percent from a year ago, a deceleration of two-tenths compared to August.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 1.1 million to 10.1 million, the largest single-month drop since April 2020, according to the BLS. While still elevated by historical standards, total vacancies are now at their lowest level since June 2021.
• The ISM Manufacturing Index declined 1.9 points to 50.9 in September, its third decline in the past four months and its lowest level since May 2020. The new orders index was down 4.2 points to 47.1, while the production index increased a modest two-tenths to 50.6. The supplier deliveries index declined 2.7 points to 52.4, its lowest level since the end of 2019, and the non-seasonally adjusted prices paid index was down eight-tenths to 51.7, the lowest level since June 2020 and its sixth consecutive monthly decline. While both indices remain in expansionary territory, the direction of the movements suggest improving supply chain logistics.
• The ISM Services Index declined two-tenths to 56.7 in September. The new orders index was down 1.2 points to 60.6, while the employment index rose 2.8 points to 53.0. The prices paid index declined 2.8 points to 68.7. While still elevated, this marks the fifth consecutive monthly decline and the lowest level since January 2021.
• Factory orders were flat in August, according to the Census Bureau. New orders for nondurable goods rose 0.2 percent following a 1.9 percent decline in July.
• The real goods U.S. trade deficit narrowed by $4.2 billion in August, the fifth consecutive month of narrowing in the trade deficit, according to the Census Bureau. Real exports rose 1.8 percent while real imports dropped 0.5 percent.
• Light vehicle sales rose 1.9 percent in September to a seasonally adjusted annualized rate of 13.7 million, according to Autodata, the highest rate since April but still well below the 2019 average of 17.1 million.
• Private residential construction spending declined 0.9 percent in August, according to the Census Bureau. Declines were concentrated in single-family construction spending, which fell 2.9 percent. Spending on multifamily construction rose 0.4 percent and spending on improvements was up 1.0 percent.

Forecast Impact:

Payroll gains slowed in September, largely in line with our expectations, but remain relatively robust. In addition, the significant drop in the number of job openings indicates labor demand may be starting to come into better balance with supply. We anticipate this trend to continue and see this as consistent with our current forecast of a recession likely occurring in the first quarter of 2023, as well as an end to the Fed’s policy tightening sometime thereafter. In the near-term we continue to expect further tightening past the end of 2022.

The significant narrowing of the trade balance in Q3 indicates that net exports will likely provide a significant boost to Q3 GDP, causing an upgrade to our near-term forecast. However, this boost is likely to prove temporary as we view this more as a normalization of global trade dynamics after a historically large trade deficit during the pandemic and a strong dollar is likely to weigh on future export demand. Other indicators, such as factory orders and the ISM manufacturing index, suggest a significant cooling of demand for goods both domestically and abroad. Further, the decline in single-family construction spending supports our forecast for ongoing declines in residential fixed investment, which historically have led the broader business cycle. Services demand remains a relative bright spot in our Q4 outlook, but we continue to believe the balance of incoming data is supportive of our view of a slowing economy tipping into a recession in the new year.

Nathaniel Drake
Economic and Strategic Research Group
October 7, 2022

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