Friday's Weak Jobs Report May Slow Fed, Lift S&P 500

The jobs report for Friday might be weaker than expected due to some technical factors, which would in turn slow down the Fed and lift the S&P 500.

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May 14, 2023 • 5 min read

The employment report due on Friday is expected to show that the U.S. added 250,000 new jobs in September. This includes 280,000 private sector jobs. This would be a significant drop from the current trend, but it is still too hot for Federal Reserve. There's still a chance for a much more softer reading, which could prolong this S&P 500 rally for a little longer.

ADP, the payroll processor, released a report on Wednesday showing 208,000 new jobs in the private sector for September. The August gain has been revised to 185,000. The combined increase of 383,000 jobs between July and August still fell short by 392,000 of the official Labor Department measure.

New data released on Tuesday showed that the number of job openings in August fell by 1.1 million to 10.053 million. This helped to maintain the rallying mood among stock traders. The S&P 500 jumped 3.1% on Tuesday after gaining 2.2% Monday. The S&P 500, however, pulled back by 0.5% on the afternoon of Wednesday.

The Fed's focus is on finding a balance between labor demand and supply. It's making progress, even though there is still a lot of work to be done. In August, the number of job openings for each unemployed person was down to 1.7, from 2.0 in July.

Paychex's and IHS Markit's report on small-business employment, released Tuesday, showed that payrolls for firms with less than 50 employees had declined slightly year-over-year. For the first time in April, wage growth fell below 5%.

Private payroll data adds to the suspicion that official payroll growth in recent months has been overstated.

According to the headline figures of the monthly employment report, which are based on a mid-month employer survey conducted by the Bureau of Labor Statistics, the U.S. has created 1.9 million new jobs in the last five months. The household survey, which is the basis for the unemployment rate, shows that the number of workers has only increased by 274,000 since march.

The reported five-month difference of 1.6m payroll jobs versus the net change in the number of people employed is the largest in history, outside of 2020 when Covid locksdowns temporarily eliminated huge numbers of nonpayroll work, such as gig jobs.

Here's the proof that when the job market had already cooled, The Fed panicked.

The household survey shows that the number of full-time workers has dropped by 383,000 in the same time period.

The household survey may have a larger margin of error but some economists believe it provides a more accurate view in terms of inflections on the job market. The Federal Reserve minutes of the meeting held on July 26-27 noted that the data provided by ADP, the employment processor to the Fed, "seemed" to indicate a weaker labor market. This was in contrast to the robust growth in payroll employment.

Why could government job reports exaggerate the growth of employment? One possible reason is an inaccurate seasonal adjustment. Take August's jobs report. The government data shows that the private sector added 308,000 jobs when adjusted for seasonality but only 57,000 unadjusted.

Seasonal adjustments are complicated by the return to school that occurs in August. It is odd that the 251,000 increase in income from the seasonal adjustment is nearly 200,000 higher than it was for 2018 or 2019. The survey week this year fell in the second half of August, compared to the third in 2018 and 2019 This means that summer employment was closer to its seasonal peak when the August 2018 household and employer surveys were conducted.

The household survey conducted last month showed that the number of 16-to-19-year-olds who were employed increased by an unimaginable 363,000 after season adjustment in August.

Recent trends show that August has seen a seasonal adjustment increase. In the last five months, seasonal adjustments factors have added 364,000 jobs to the private sector in 2022 as compared with the average adjustment for 2018, 2019, and 2021.

We're due some payback. A soft seasonal adjustment contributed to the weaker job growth reported on Friday.

Also, the adjustment for new companies and the death of non-viable firms, which neither report to the Labor Department data, could be off. Over the last two months, the adjustment has increased the number of jobs by 418,000. This is 110,000 more jobs than the average birth/death adjustments over the same time period in 2018, 2019, and 2021.

The adjustment for births and deaths reflects a lot of past trends. Labor Department statisticians do not attempt to account for current economic conditions. The current economic conditions are not ideal. Interest rates are surging during the Fed's most aggressive tightening cycle in the 1980s.

Even if Labor Department's projections for net job additions due to the birth or death of companies are too optimistic, it may not have an impact on September's employment figures. This is because September tends to be one of the slowest months for this type of job. The net birth and death adjustment reduced the total number of jobs by 87,000 from the unadjusted seasonally adjusted total for September 2021.

According to CME Group’s FedWatch page, the odds were 60% as of Tuesday morning that the Fed would raise its key rate by another 75 basis points next week. This would put the overnight fed funds lending rate in a range between 3.75% and 4%. The markets are increasingly confident (now at 44%) that Fed will only raise rates to a range between 4% and 4.25% by the end of the year, perhaps with just a quarter point rate increase in December.

A soft jobs report could strengthen the case for Fed moderating and reduce the risk of a global financial markets train wreck caused by aggressive tightening.

It's still probably too early to expect a sustained S&P 500 rise. One thing is that a return to seasonal adjustments in the September report could negate a large part of the apparent increase in labor force seen in August. This could lower the unemployment rate from 3.7% to 3.6%, highlighting tight labor markets.

As financial markets recover, the Fed is given more flexibility to tighten policy. Although it is not certain that federal funds will reach the 4,6% mark, as projected by the Fed last month's projections, policymakers intend to keep policy tight for a long time.

The labor market is too tight, even if it is not as strong as the initial impression. It won't be easy or quick to get out of the current global crisis of high inflation and debt, low economic growth, and geopolitical danger.

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