Jobs Report: Weak October Data May Blunt Fed Chair Powell's Hawkish Talk

The jobs report for October is expected to be much weaker than anticipated, which may throw a curve ball after Fed Chair Jerome Powell tried to bury talk of a pivot.

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May 14, 2023 • 3 min read

The Friday jobs report will be the softest since December 2020. This is due to a 210,000 rise in payrolls. There are reasons to believe it could be even worse -- possibly so bad that some may reconsider the Fed's plans to raise rates.

Wall Street, after four consecutive rate increases of 75 basis points, was waiting for signs that the Fed would be ready to switch to a slower pace. Powell changed the script, even though the Fed's policy statement appeared to confirm it. He said that the important question is not how fast they are going, but rather, "how far will they go?"

Powell stated that he believes rates should be raised to a range of 5%, which is higher than the range of 4.5%-4.75% seen in the policymakers' projections for September.

The Fed's rate-hike pace is crucial. Further tightening is difficult to justify when the labor market starts to crack. If the crack occurs soon, the Fed might not hike as much as Powell anticipates. This could mean a soft landing for the U.S. Economy and S&P500.

Markets now see 53% of the chance that there will be a fifth consecutive 75-basis point increase on December 14, up from only 42% on Wednesday. These odds may fall dramatically on Friday. This is due to some technical issues, mostly relating the wacky adjustments made for seasonal data in most of this past year. These adjustments will be reversed in a major way.

In the first nine month of the year, the seasonal adjustment has increased private payrolls by 851 000. This is a half million extra jobs in comparison to the average seasonal adjustment impact from September 2013 to 2021.

By definition, seasonal adjustments should equalize over the course the year. This is usually the case.

Since 2013, the net cumulative seasonal adjustment has only exceeded zero in one year (+83,000 in 2016.

This means that we are about to see a major payback on the 851,000 seasonal boost to private sector payrolls from September. The October jobs report is expected to show the most dramatic reversal.

The closest comparison is 2021's season adjustment. The seasonal adjustment for October last year reduced private payrolls to 709,000, compared with a -533k adjustment in 2019 or -465k in 2018.

We should expect a negative change in the October and November jobs reports, since this year's net seasonally adjusted through September was +265,000 in comparison to 2021.

To give a sense of context, the private sector payrolls in October and in November 2018 and 2019 rose by around 1 million without adjusting for seasonal effects. After seasonal adjustment, a similar total could result in a flat or even negative payroll reading this year.

The combination of a massive seasonal adjustment and modest holiday hiring plans could produce a particularly weak jobs report.

The big seasonal adjustment last year coincided with a hiring spree during the holidays. This year, holiday hiring doesn't look as good.

Challenger, Gray & Christmas, an outplacement firm, reported on October 6 that in September, companies had announced plans to hire 380,000 employees. This was down from almost 940,000 workers a year earlier and the lowest total for September in 2011.

It is possible that some companies, like Amazon.com AMZN (which planned to hire 150,000 seasonal employees) delayed their announcements until October.

Walmart (WMT), however, announced plans to employ 40,000 people, down from the 150,000 it had planned a year earlier. Macy's cut its hiring plans to 41,000, down from 76,000. UPS (UPS), Target (TGT), and other companies have announced the same plans as last year to hire 100,000 people. FedEx (FDX), who announced a major cost-cutting program in September that included closing certain sorting facilities because of lower volumes, has not made any announcements about hiring intentions. The company will hire 100,000 seasonal workers in 2021.

The tight labor market makes it difficult for employers to hire on time. This year will be more difficult, as payroll employment has increased by 5.26 million since last year.