Behind the Shutdown: What We’re Seeing in the Labor Market
Behind the Shutdown: What We’re Seeing in the Labor Market
- Services and manufacturing surveys show hiring slowed in September.
- Labor gains this year continue to fall behind pace.
- The slowdown will increase pressure on the Fed to support growth.
The domestic hiring picture remained soft in September…
This week was supposed to bring an important update on the economic growth outlook. The U.S. Bureau of Labor Statistics (BLS) was originally scheduled to release its payroll data for September on Friday. But due to the ongoing government shutdown, those numbers have been placed on hold.
Wall Street is predicting the economy added 59,000 jobs last month. If that turns out to be the case, it’ll be a disappointment compared to the typical September gain of 212,000 employees since 2015. It would further cement the weakest annual pace of hiring we’ve seen during that stretch…
Like August, September tends to be one of the toughest months to find a job. Based on recent Fed business surveys, that remained true. In fact, the numbers suggest hiring likely worsened last month. If the national data confirms that, it points to a slowing economy. That would strengthen the case for more interest rate cuts from the Federal Reserve into year-end, supporting a steady rally in the S&P 500 Index.
But don’t take my word for it, let’s look at what the data’s telling us…
Each month, several regional Fed banks survey manufacturing and services firms in their districts to gauge business activity. I focus on the employment and inflation components from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Together, they represent roughly 32% of U.S. GDP. These surveys offer an early read on national trends, especially since they’re released ahead of market-moving reports like the BLS payrolls.
Today, I’m focusing on employment. Let’s break down the individual components before zooming out to the broader picture.
Starting with the manufacturing surveys…
The chart above shows the sector hiring trend over the last seven years. After the pandemic collapse, factory hiring surged. But since then, the numbers have gradually eased. On the right side of the chart, you’ll notice that manufacturing employment held steady for most of this year. Then, after a brief breakout in July and August, it appears to have slowed again in September.
The services sector fared no better…
Hiring waned last month, with the gauge falling into negative territory. Outside of Philadelphia’s resurgence, every other region was decisively negative. But it wasn’t just hiring that dropped. Across the board, most categories—revenue, pay, inventories—all slipped.
To get a clearer national picture, I combined the manufacturing and services data into a single gauge—weighted 80% services, 20% manufacturing, in line with the domestic employment breakdown. I also weighted each district according to its GDP contribution…
As you can see, after a brief mid-year bounce, the overall hiring picture continues to weaken. My combined index showed a contraction in September.
Now, let’s look at the combined Fed employment gauge compared to nonfarm payroll data for historical perspective…
In the chart above, I used a three-month rolling average to smooth out volatility and better capture the trend. As you can see, the combined Fed survey data tends to lead national hiring. The three-month average rose in December, just ahead of a strong nonfarm payrolls report. But it rolled over at the start of this year. In September, the three-month average came up just short of contraction territory
Bottom line: manufacturing and services employment remains fragile. If the BLS confirms this trend when it finally releases the numbers, it’ll mean the hiring pace continues to fall short of historical norms.
And if that happens, Wall Street should grow increasingly confident in its expectation of two more rate cuts by year-end. Fed policymakers—including Chairman Jerome Powell, Governor Christopher Waller, and Boston President Susan Collins—have signaled they’re open to easing policy if employment falters.
Lower rates would push borrowing costs down, free up cash for households and businesses, and underpin economic growth. That would support a continued long-term rally in the S&P 500.
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