A hiring sign is posted on the outside of Urban Outfitters at Tysons Corner Center mall on August 22, 2024 in Tysons, Virginia.
Anna Rose Leyden | Getty Images
September's massive payroll increase is pulling the US economy out of the shadows of recession and giving the Fed a fairly open path to a soft landing.
If this sounds like a moderate scenario, it's probably not far from it, even with persistent inflationary fears straining consumers' wallets.
A gravity-defying jobs market, at least a slowing pace of price increases and lower interest rates, puts the overall picture in a very good place at the moment – a critical time from a political and economic standpoint.
“We were expecting a soft landing. This gives us more confidence that it looks like it's going to stay in place,” Beth Ann Bovino, chief economist at U.S. Bank, said following the release of Friday's nonfarm payrolls report. “It also increases the likelihood of a non-fall as well, meaning stronger economic data for 2025 than we currently expect.”
The payroll count was certainly better than almost anyone expected, as companies and the government combined to boost payrolls by 254,000, leading to a Dow Jones consensus of 150,000. It was a big step up from even the upwardly revised numbers in August and reversing a trend that began in April. From slowing job numbers and increasing anxiety about a broader slowdown – or worse.
Moreover, this effectively eliminated any chance of the Fed repeating its half-percentage-point interest rate cut since September anytime soon.
In fact, futures markets reversed their positions after the report, pricing in the near-certain possibility of a move of just a quarter-point at the Fed's November meeting, followed by another quarter-point in December, according to CME Group's FedWatch gauge. Previously, markets had been looking at a half-percentage-point rise in December, followed by the equivalent of quarter-percentage-point cuts at each of the Federal Open Market Committee's eight meetings in 2025.
Not a perfect picture
But that is no longer the case, as the Fed can, barring further labor market disappointments, adopt a moderate pace during the easing cycle.
“If we continue to see a stronger-than-expected economy, it may give the Fed reasons to slow the pace of interest rate cuts through 2025 with the exit rate being slightly higher than it currently expects, all while the economy continues to remain strong.” Bovino said. “This would be good news for both the Fed and the economy.”
To be sure, there are still some flaws in the jobs picture.
More than 60% of September's growth came from the usual suspects — food and beverage establishments, health care, and government — all of which were beneficiaries of fiscal largesse that pushed the 2024 budget deficit to the brink of $2 trillion.
There were also some technical factors in the report, such as a low response rate from survey participants, which could cast some clouds on sunny Friday's report and lead to downward revisions in subsequent months.
But overall, the news was very good and raised questions about how aggressive the Fed should be.
Questions for the Federal Reserve Bank
For example, economists at Bank of America asked, “Has the Fed panicked?” in a note to clients suggesting a cut of half a percentage point, or 50 basis points, in September, while others questioned extreme volatility and misjudgment among Wall Street experts. David Royal, chief financial and investment officer at financial services firm Thrivent, speculated that it was “questionable” that the Fed would have cut this much “if it had known this report was going to be this strong.”
“The question becomes, how does everyone keep getting things so wrong?” “How can we not get that number right with all the information we're getting?” said Cathy Jones, chief fixed income strategist at Charles Schwab.
Jones said the Fed will face a dilemma as it figures out the appropriate policy response. The Federal Open Market Committee meets November 6-7, immediately after the US presidential election and after a five-week period during which it will have a lot to digest.
Some comments after the meeting suggested the Fed may have to raise its estimate for a “neutral” interest rate that neither promotes nor restricts growth, an indication that benchmark interest rates will settle somewhere higher than they have been in the recent past.
“What does the Fed do with this? Certainly, 50 basis points is not on the table at the next meeting. I don't think there is any justification for bringing this up,” Jones said. “Are they stopping? Are they doing another 25 (basis points) because they are still far from neutral? Are they just comparing that to other data that may not be as robust? I think they have a lot of discovering to do.”
But in the meantime, officials will likely be content to know that the economy is stable, that the labor market is not as troubled as expected, and that they have time to evaluate their next move.
“We've seen a pretty great economy over the last few years, despite some naysayers and lackluster consumer sentiment,” said Elizabeth Renter, chief economist at NerdWallet. “In an election year, emotions run high, and every economic report or event can spark intense reactions. But economic aggregates tell us that the U.S. economy has been and continues to be strong.”
