September Jobs Report Preview: Labor Market at a Crossroads

This Friday, the Bureau of Labor Statistics (BLS) will release the September jobs report. Last month, the labor market slowed to a cooler pace, consistent with the slowing economy overall, though the labor market overall remains hot. That’s likely to continue in September as the Federal Reserve continues to let air out of the labor market in an attempt to get inflation under control. While the labor market is still healthy, it stands at a crossroads as monetary policy increasingly moves to constrain the labor market.

Here are three trends we'll be watching for in the September jobs report:

Unemployment Insurance Claims Still Show Tight Labor Market

Unemployment insurance claims have been falling over the last few weeks, with initial claims in the latest data for the week ending September 24, 2022 at their lowest level since April 2022. UI claims—a very rough proxy for layoffs—are signaling that the labor market remains hot. Despite an increase in the spring, claims remain near pre-recession levels, signaling that even as the economy slows, employers are hesitant to let go of the workers they do have.

Keep an Eye on Black Labor Force Participation

One concerning statistic from August’s jobs report was Black labor force participation, which fell to 61.8 percent. This was the third month in a row of declines and the lowest level in 2022. As the economy shifts into a lower gear, there is a risk that a slowdown has a disproportionate impact on Black workers. 

While it’s not immediately clear what drove the drop in Black labor force participation in recent months, one notable contributing factor is the ongoing pandemic. Black workers are three times more likely to report the pandemic as their reason for remaining out of the labor force, likely in part due to the disproportionate health impact of COVID-19. As the economy slows, it will be important to watch whether racial inequality widens, especially if the pandemic persists.

Federal Reserve Unemployment Projections Point to Economic Red Flag

The Federal Reserve’s economic projections for Q4 2023 project an unemployment rate of 4.4 percent, a significant increase from 3.7 percent in August and their projection of 3.8 percent for Q4 2022. A 0.6 percentage point increase in the unemployment rate from Q4 2022 to Q4 2023 would be a red flag for the economy. An unemployment rate increase of that size has coincided with all 13 recessions in the U.S. since 1948—a similar observation to the Sahm Rule. 

While the Fed’s projections should not be regarded as a forecast, this does signal that the Fed is increasingly recognizing the likelihood of rising unemployment rates as a result of their monetary policy. A soft landing is not out of the cards yet, but it is looking increasingly difficult as the Fed hardens its resolve to bring inflation down even at the cost of economic pain in the labor market.

Conclusion

The labor market is still hot, with job gains well exceeding pre-pandemic levels. The question remains how long the job market can remain hot as the Fed continues to pour on cool water. As we approach the end of the year, restrictive monetary policy will begin to bite more, especially in interest-rate sensitive sectors. Additionally, the war in Ukraine, a slowing global economy and the ongoing pandemic remain significant risk factors looming over the economy. The labor market is often a lagging economic indicator and, as the economy confronts multiple headwinds, it remains to be seen whether the labor market can avoid a recession.