Weekly Market Perspectives: Mixed labor data is a welcome development for Wall Street

Published: September 5, 2023

It was another week in the market where data was viewed through the lens of the impact to interest rates, and the labor market took center stage. Across several data reports which showed a mixed, but softening labor market, investors took this as a welcome development since the Federal Reserve will likely hold off on any interest rate increases in the near-term. The market responded positively with the best week since June – the equity markets (S&P 500) ended the week higher by +2.5% and the US aggregate bond index traded higher by +0.5% as rates fell in the short and middle part of the curve.

First, starting on Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) showed US job openings fell to a two-year low in July and have now fallen for six of the past seven months suggesting labor demand continues to cool. According to the BLS survey, the number of available positions fell by more than expected, decreasing to 8.83M in July from 9.17M in June. The reduction in open positions largely came from white collar industries – professional and business services, health care, and government saw the largest reductions in open positions. The dynamics in the labor market have become better balanced in recent months as fewer vacancies along with a higher labor participation rate have helped moderate wage growth. In addition, the quits rate, which measures voluntary job departures and is taken as a sign of confidence in finding a new job quickly, dropped to 2.3%. This marks the lowest quits rate since the start of 2021 and implies workers are becoming less confident of finding another job in the current labor market.

Second, the ADP (Automatic Data Processing – a payroll company) report on Wednesday came in below expectations, adding 177k jobs in July versus 195k expected. The report showed that most gains came in large and medium-sized business predominantly in service industries and located in the South as well as Northeast regions. The data showed that most gains came in health and education services whereas professional, business, and financial services added fewer jobs. While July showed the fewest jobs added since March, the prior month was revised higher by nearly +50k jobs.

Ahead of the Friday payrolls release from the Bureau of Labor Statistics (BLS), more data on the labor market was released on Thursday from the Department of Labor. Initial jobless claims modestly beat expectations and showed that new unemployment insurance claims continue to trend lower; however, continuing claims came in above expectations highlighting that recently unemployed workers are having a more difficult time re-entering the labor force.

Finally, the most closely watched labor report on Friday showed a cooling market but still exhibiting positive hiring momentum. Companies added 187k jobs in August in a broad-based advance compared to consensus estimates of 170k, although there were downward revisions to payrolls for June and July. The report also showed that earnings growth slowed to a pace not seen since early 2022, a welcome sign for the Fed. Another welcome development for the Fed was the unemployment rate climbed to 3.8% (up from 3.5%), the highest since early last year. There is some noise in the data, largely from the writers’ strike in Hollywood and the collapse of transportation giant, Yellow Trucking, but the increase was attributable to workers coming off the sidelines attracted by new opportunities and higher wages. The overall participation rate — the share of the population that is working or looking for work — rose for the first time since March to 62.8%, the highest since February 2020. Thousands of new workers entered the labor force, though many job seekers were unable to find work quickly. The modest job creation, increase in labor participation, and slower wage growth gives the Federal Reserve room to hold interest rates later this month while keeping options open for another hike later in the year. For now, the signs from the labor market suggest the soft landing remains possible.

Source: Bloomberg, Department of Labor, Bureau of Labor Statistics, ADP Research Institute