Friday’s jobs report could be a case where good news isn’t really good



A worker takes a panini sandwich off a grill at a restaurant in the Union Market district in Washington, D.C., on Tuesday, Aug. 30, 2022.

Al Drago | Bloomberg | Getty Images

Investors are closely watching the nonfarm payrolls report due out Friday, but not for the usual reasons.

In normal times, strong job gains and rising wages would be considered a good thing. But these days, they’re exactly what the U.S. economy doesn’t need as policymakers try to beat back an inflation problem that just won’t seem to go away.

“Bad news equals good news, good news equals bad news,” Vincent Reinhart, chief economist at Dreyfus-Mellon, said in describing investor sentiment heading into the key Bureau of Labor Statistics employment count. “Pretty much uniformly what is dominant in investors’ concerns is the Fed tightening. When they get bad news on the economy, that means the Fed is going to tighten less.”

Economists surveyed by Dow Jones expect the report, due out Friday at 8:30 a.m. ET, will show that payrolls increased 275,000 in September, while the unemployment rate held at 3.7%. At least as important, estimates are for average hourly earnings to increase 0.3% month over month and 5.1% from a year ago. The latter number would slightly below the August report.

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Any deviation above that could signal that the Federal Reserve needs to get even more aggressive on inflation, meaning higher interest rates. Lower numbers, conversely, might provide at least a glimmer of hope that cost of living increases are at least abating.

Wall Street forecasters were split on which way the surprise might come, with most around the consensus. Citigroup, for instance, is looking for a gain of 265,000, while Nomura expects 285,000.

In search of middle ground

For investors, the focus will be keen on what wages are saying about the state of the labor market.

Even hitting the consensus 5.1% increase means wage pressure “is still high. Markets might want to reconsider a sanguine view of what the Fed plans to do,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings. “The Fed is planning an aggressive stance. A hotter wage reading would just confirm their position.”

Policymakers essentially are looking for Goldilocks — trying to find monetary policy that is restrictive enough to bring down prices while not so tight that it drags the economy into a steep recession.

Comments in recent days indicate that officials still consider slowing inflation as paramount and are willing to sacrifice economic growth to make that happen.

“I want Americans to earn more money. I want families to have more money to put food on the table. But it’s got to be consistent with a stable economy, an economy of 2% growth” in inflation, Minneapolis Fed President Neel Kashkari said Thursday during a Q&A session at a conference. “Wage growth is higher than you would expect for an economy delivering 2% inflation. So that gives me some concern.”

Likewise, Atlanta Fed President Raphael Bostic on Wednesday said he thinks the inflation battle “is likely still in the early days” and cited a still-tight labor market as evidence. Governor Lisa Cook said Thursday that she still sees inflation running too high and expects “ongoing rate hikes” to be necessary.

However, worries have shifted in the market lately over the Fed doing too much rather than too little, as some indicators in recent days have pointed to some loosening of inflation pressures.

The Institute for Supply Management on Wednesday reported that its September survey showed expectations for prices around their lowest levels since the early days of the pandemic.

Recent BLS data indicated that prices for long-distance truck deliveries fell 1.5% in August and are well off their January record peak (though still up nearly 22% from a year ago).

Finally, outplacement firm Challenger, Gray & Christmas reported Thursday that job cuts surged 46.4% in September from a month ago (though they are at their lowest year-to-date level since the firm began tracking the data in 1993). Also, the BLS reported Tuesday that job openings fell by 1.1 million in August.

Correcting a mistake

Still, the Fed is likely to keep pushing, with chances rising that the economy enters into recession if not this year then in 2023.

“The Fed’s mistake is already made i.e. not moving in advance of inflation rising. So it has to double-down if it’s going to deal with the inflation problem,” Reinhart said. “Yes, recession is inevitable. Yes, the Fed’s policy is probably going to make it worse. But the Fed’s policy mistake was earlier, not now. It’s going to catch up because of it’s previous mistake. Hence, recession is around the corner.”

Even if Friday’s number is weak, the Fed rarely reacts to a single month’s data point.

“The Fed will keep hiking until the labor market cracks. To us this means the Fed is confident that payrolls growth has slowed and unemployment is on an upward trajectory,” Meghan Swiber, rates strategist at Bank of America, said in a client note. In real terms, Swiber said that likely means no change until the economy is actually losing jobs.

There was, however, one instance where the Fed did seem to react to a single data point, or two points more specifically.

In June, the central bank was set to approve a 0.5 percentage point rate increase. But a higher-than-expected consumer price index reading, coupled with elevated inflation expectations in a consumer sentiment survey, pushed policymakers in an 11th-hour move to a 0.75 percentage point move.

That should serve as a reminder on how focused on the Fed is on pure inflation readings, with Friday’s report possibly viewed as tangential, said Shannon Saccocia, chief investment officer at SVB Private Bank.

“I don’t think the Fed is going to pivot or pause or anything of that nature before the end of the year, certainly not because of jobs data,” Saccocia said.

Next week’s CPI reading is likely to be more consequential when it comes to any shift in Fed attitudes, she added.

“Wages are embedded in the cost structure now, and that’s not going to change. They’re probably going to put more emphasis on food and housing prices in terms of their areas of interest, because all that can happen now [with wages] is we stabilize at current levels,” Saccocia said. “Any sort of lift we got out of this print [Friday] is likely to be temporary, and tempered by the perception that this is all really about CPI.”

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