Slow Job Growth Gives Stocks a Boost But May Signal Trouble Ahead for Economy

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November 3, 2023

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The October jobs report brought moderately good news for Wall Street on Friday, with slower than expected U.S. job growth sending stocks higher as investors saw signs the Federal Reserve could ease up on interest rate hikes. But the lower payroll numbers also raise concerns about a potential economic downturn ahead.

The Labor Department reported employers added 150,000 jobs last month, missing expectations of 170,000. The unemployment rate ticked up to 3.7% from 3.5%.

Major stock indexes rallied on the news, with the Dow Jones Industrial Average closing up nearly 800 points or 2.6% and the S&P 500 jumping 2.5%. The Nasdaq composite rose 2.9%.

Investors cheered the cooling labor market as an indication the Fed’s aggressive series of rate hikes this year are beginning to achieve the desired effect of slowing growth to tame high inflation.

“The Fed finally got what it’s been looking for — a meaningful slowdown in the labor market,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office.

Traders lowered bets on another large 0.75 percentage point rate increase in December. Markets now see a less than 10% chance of a December hike and are pricing in potential rate cuts by May 2023, according to CME Group data.

“A cut could signal the Fed’s concern about negative economic growth, which markets want to avoid,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Fed officials maintain rates will need to stay elevated for some time to control inflation. “Cuts have not been a part of the conversation,” said Fed Chairman Jerome Powell on Wednesday.

Weaker Jobs Data Follows Other Signs of Economic Slowdown

The softer October jobs number follows other indications this week the economy is losing steam after a strong first half of 2022. The housing market has cooled considerably with mortgage rates above 7%, manufacturing activity is slowing and GDP grew just 2.6% in the third quarter, down from 8.5% and 6.6% in the first two quarters.

“You could imagine scenarios where demand comes off and you have to do something,” said Richmond Fed President Thomas Barkin on Friday. But he added rate cuts still seem “pretty far out the distance.”

The October jobs gains were weighed down in large part by the return of 48,000 auto workers who had been on strike in September at General Motors and Ford. Temporary jobs also fell by 21,000 last month.

Excluding autos, payrolls would have risen by 198,000 in October, according to the Labor Department. Job growth averaged 397,000 a month in the first nine months of the year.

October job growth was led by gains in healthcare, professional services and manufacturing. Employment remains 2.2% below pre-pandemic levels.

Unemployment Creeps Up as Labor Force Expand

The unemployment rate ticked up to 3.7% from a 50-year low of 3.5% as more people entered the labor force. But the participation rate dipped to 62.2% from 62.3% in September, signaling there is room for further job gains.

There are still nearly 1.9 job openings for every unemployed person, giving job seekers continued leverage in the tight market.

“If the goal is to return employment to pre-pandemic levels, October’s job gains of nearly 200,000 and an unemployment rate under 4% would historically be consistent with a very strong labor market,” Indeed economist AnnElizabeth Konkel said.

Average hourly earnings rose 12 cents to $32.58 last month, a 4.7% increase from a year ago. Wage growth remains well above pre-pandemic levels but has moderated in recent months, easing some inflation worries.

Economists said the October report indicates a gradual cooling of the jobs market. “The labor market is still fairly tight but some of the heat is coming out,” said Rubeela Farooqi of High Frequency Economics.

Soft Landing for Economy Still Possible But Risks Tilted to Downside

The slower pace of job growth gives the Fed room to continue its balanced tightening approach without more aggressive hikes. Policymakers want to cool demand enough to tame inflation running near 40-year highs but not trigger a recession.

“This report supports a slower pace of hikes going forward,” said Sal Guatieri of BMO Capital Markets. He expects a 50 basis point increase in December.

But economists note risks remain tilted to the downside. “The risks of recession have increased with the cumulative tightening in financial conditions this year,” said Pooja Sriram of Barclays.

Global headwinds from the war in Ukraine, China’s zero-COVID policy and rising worldwide interest rates also loom as wildcards that could derail the U.S. economy.

While the October jobs data provided some relief, a period of below-trend growth and a slight uptick in unemployment appears increasingly likely in coming months.

“The Fed is focused squarely on lowering inflation, even if that means driving the economy into a mild recession,” said Nationwide chief economist David Berson. “Aggressive Fed policy tightening will lead to a weaker economy.”

Looking ahead, all eyes will be on upcoming inflation and retail sales data for November as the latest indicators of where the economy stands. For now, investors welcomed a Goldilocks October jobs report — not too hot, not too cold. Moderately slower job growth could help ease rate hike worries without crushing the labor market.