Media Reports Strength in the Labor Market, Manufacturing PMI Shows Stagflation

A recent report released by the Job Openings and Labor Turnover Survey (JOLTS) shows that there were around 8.04 million job openings in August, against an anticipated number of 7.682 million. Overall, the US economy added 142.000 jobs during August and the unemployment rate has dropped to 4.2%, from 4.3% in July.

• This comes after the labor market saw jobs shrinking in July, when it only managed to add 114,000 jobs and the unemployment rate increased from 4.1% to 4.3%. Even after August's good performance', the rates are not back to what they were in June.
• One could say that an unemployment rate of 4.2% is decent, given the economic conditions. But it is still higher than what it was before the pandemic when it stood at around 3.6% in January 2020.
• This means that as of now, there are 1.1 jobs for every person looking to get employed. This is almost half of what it was in March 2022, when the rate stood at 2.03.

Industries like construction, warehousing and utilities, transportation, and state and local government were the major contributors to the job market and added the most jobs.

Ryan Sweet, chief US economist at Oxford Economics, said that while August was a good month for the market, economics must not get too excited. It is important to string a few months' of continuous increase in job openings.

At the same time, Sweet acknowledged the fact that the rate of increase in job openings does not correspond with the rate of growth in the US labor force, which ultimately will lead to more unemployment in the coming few quarters.

ISM's Manufacturing Data

However, ISM's manufacturing data doesn't support the job increase. The manufacturing sector contracted for the sixth consecutive month in September.

Timothy R. Fiore, Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee, said that contracting manufacturing activity can be attributed to the following factors:

• Contraction in new orders - there hasn't been any consistent growth in the last 24 months. In September, the New Orders Index contracted for the sixth month straight and stood at 46.1%. Experts aren't very hopeful for the coming months as well, as they now wait for the effects of FED rate cuts to kick in.
• Contraction of new export orders - The New Export Orders Index slipped 3.3% in September and stood at 45.3% after contracting for 4 consecutive months. This is due to weakening international economies.
• Customers' inventory isn't encouraging - The Customers' Inventories Index was recorded at 50% in September, showing an improvement of 1.6% compared to August. Experts consider the currency demand levels to be neutral to negative'.

There are other factors in play here as well. For example, the uncertainty surrounding the upcoming US election and the federal monetary policy had prevented manufacturers from investing big in capital and inventory.

Unless the manufacturing sector sees an increase, the overall economy will not be able to sustain the job vacancy increase in the long run.

The same ISM report also brings in some daunting news for job seekers. The Employment Index was recorded at 43.9%, decreasing by 2.1% compared to August. In fact, the readings recorded during the months of July, August, and September are one of the lowest ever recorded.

Respondents' companies are continuing to reduce headcounts through layoffs, attrition, and hiring freezes.

Real Wages Have Been Falling

The slowing job market has also had an effect on the common man's savings. Although stats show that the increase in wages at 4.6% is higher than inflation at 2.5%, the inflation-adjusted real wages are on the decline.

As per Statista, the real wage in the US hasn't changed since 2010 and still stands at $7.25 per hour in 13 US states. While the inflation-adjusted wages were $10.32 in 2010, it has dwindled to $7.47 in 2023 - a 27.6% decrease. This means that a worker on minimum wage has seen his purchasing power decline over the years with no increase in wages.

Another report highlights that if the wages grew with productivity over the year, it should now stand at $22.88/hour - almost thrice of its current levels. In fact, from 1973 to 2013, productivity increased by 74% while hourly compensation increased by just 9%, making the average American poorer by the year.

Source: EPI analysis of Bureau of Labor Statistics and Bureau of Economic Analysis data

This means that the output the workers generate is much greater than the compensation they are receiving. Most of the value is gobbled up by large corporations and other stakeholders, leaving peanuts for the common worker.

This shows that the real wage problem has existed since the early 2000s but was fueled and made worse by the pandemic. So, even if the job market shows improvements in the coming months, your real wages aren't going to increase anytime soon.

The U.S. East Coast and Gulf Coast dockworkers went on a strike on 1st October for the first time in 50 years demanding better pay rates - nearly a 50% increase. The International Longshoremen's Association union (ILA) is currently negotiating a six-year contract, which includes a $5 per hour raise, among other things.

This only goes to show how inflation has impacted people's savings. While shippers have made huge profits post the pandemic, only little of that has trickled down to the workers who actually work on the ground. As per JP Morgan, this strike can cost as much as $5 billion every day to the US economy.

Is the Fed too late?

The Fed cut interest rates by 50 basis points in September for the first time in 4 years, lowering the interest rate target to a range of 4.75% to 5%. Now, in theory, lowering interest rates makes borrowing more affordable, encouraging people to take out more loans for consumption and investment. This, in turn, increases the demand for goods and services, improving manufacturing.

However, none of this happens if the interest rate cut is too late. While it is still early to predict how the US economy will react to this change, experts believe that the Fed has kept its interest rates too high for too long, and this rate cut might be a tad too late.

The manufacturing and production index has been contracting, job openings aren't increasing at a rate to absorb the available workforce, employment rates are at an all-time low, and consumption is showing signs of fatigue. Amidst all this, inflation sits at around 2.5%, which is nearing the Fed's goal of 2%.

Regardless of the interest rates, consumers are likely to borrow more when the inflation is high, as compared to when it dwindles down. And now that inflation can be said to be within control', it is unlikely that consumers would still want to borrow, even after the slashed rates. Thus, the Fed's wait and watch' approach might just backfire and it may have to bear the burden of the late rate cut.

Now, this means that the current rate cut may not be enough to achieve the goals the Fed wants. Federal Reserve Bank of Chicago President, Austan Goolsbee, said that it'll require many more rate cuts over the next year' if anything is to be done about increasing unemployment.

The effects of the current rate cut will start kicking in in six months or so, which is when we'll get a more clear picture of how the US economy is shaping up, when it comes to employment.

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