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Job growth surged in September

Gains were concentrated in healthcare, leisure and hospitality.

October 6, 2023

Payroll employment surged 336,000 in August, with 119,000 upward revisions to the previous two months. That mean that hiring accelerated over the summer, which helps explain the surge in consumer spending and overall economic growth we saw over the period. Preliminary data suggests that real GDP growth topped 5% in the third quarter, the fastest pace since the fourth last year when the economy was still reopening.

The survey response rate was 68.2% in September, the lowest since 2005. This is becoming a pattern; it wreaks havoc on revisions to the data. The eight-month trend for downward revisions to the data did a hundred-and eighty-degree turnaround in August. Historically, the initial report on August was revised up much more than it was revised down. The timing of the return to school tends to further disrupt August seasonal factors.

Public payrolls accounted for 73,000 of the job gains. Federal, state and local governments all added to payrolls. Public education at the state and local levels accounted for 39,900 of those jobs; the remainder was concentrated in infrastructure improvements at the local level. The federal government added 6,000 jobs, most likely at the IRS.

Private sector job gains were driven by leisure and hospitality, which added 96,000 during the month. Restaurants have finally returned to their pre-pandemic peak. That coincides with the new business formation data, which now dominates food services. Restaurants are following workers, who are working hybrid or fully remote jobs, and spending more of their discretionary wallets in the suburbs than in urban centers. Accommodation also added jobs but remains well below the February 2020 peak.

Healthcare and social assistance were next up with a jump of 65,900 new jobs. Job gains were broad-based. Employment in childcare centers increased modestly but remained nearly 40,000 below the peak in February 2020. COVID era subsidies expired on October 1, which could deal a setback to a sector that is critical to keep working parents participating in the labor force.

Professional and business services is no longer a primary category driving job gains; it added 21,000 new paychecks after moving largely sideways since May. Hiring temporary workers is down by almost a quarter million from its peak in March 2022.

Retail added 20,000 jobs, manufacturing added 17,000 jobs and construction added only 11,000. That is the weakest read on construction since April; more than all of those gains were accounted for by an increase in residential construction, where builders are offering incentives and smaller homes to keep first-time buyers in the market amidst surging mortgage rates.

Hiring in the information sector, which includes moving pictures and production workers, fell by another 6,600 workers. We are now down 45,000 from the peak in May 2023, which reflects the effects of the writers' and actors' strikes. The writers' strike was settled September 27; late night television returned the first week of October. The actors' strike continues.

The UAW went on strike late in the survey week for September; it is not expected to show up until the October employment report. Anyone who is striking or affected by the strike and does not show up on payrolls next week will not be counted as working. However, strikers are not counted among the unemployed.

Average hourly earnings rose 0.2%, less than expected largely on the surge in low-wage jobs in food services. Earnings in leisure and hospitality were unchanged during the month. Wages in the information sector, which were hit hardest by strikes, actually declined slightly. Wages in the information sector, financial services and profession and business services have all cooled after driving wage gains during the height of the hiring frenzy in late 2021/early 2022. The year-over-year gains in average hourly earnings slowed to 4.2% in September from 4.3% in August.

Separately, the unemployment rate held steady at 3.8% with the participation rate holding at the post-pandemic high of 62.8%. The number of unemployed increased only slightly but those gains were largely due to a rise in the total labor force, not layoffs. A surge in teen participation is the primary reason for the jump in participation rates in August and September. That looks like a quirk in the seasonal adjustment of the data, as teen participation fell before seasonal adjustment in both August and September. Those two months are tricky to adjust given the return to school.

Prime-age (25–54-year-old) men's participation in the labor force picked up, while women lost ground. The participation rate for men and teens of color increased during the month, while the participation rate among whites deteriorated.

The number of people out sick and unable to work crept up again in September to 1.2 million, with a rash of new COVID cases. That is slightly above the norm we saw pre-pandemic and leaves employers with front-line workers with slightly more staffing shortages; the silver lining for those employers is that they are more able to fill jobs than in the past. The ranks of foreign-born workers are up 1.1 million from a year ago. That is a moderation from the pace of August, which showed a 1.8 million increase from a year ago.

Multiple job holders are the highest level since early 2020, but still below the pace of January 2020. Those accepting part-time jobs for economic reasons plummeted during the month, while those choosing to work part-time increased.

The ranks of those out on vacation fell to 2.1 million, which is still the highest since 2015 for the month. The benchmark revisions for the income and spending data that we saw last week revealed households entered the year and still have a significant cushion on excess savings. As of August, our estimates suggest that households were still sitting on more $1.4 trillion of the $2.3 trillion amassed during the pandemic. Wealth across income strata was also up since 2019 as of the end of second quarter of 2023. The highest income strata accumulated the most wealth since the onset of the pandemic, but gains were broad-based.

The stronger-than-expected growth figures justify higher interest rates.

Diane Swonk, KPMG Chief Economist

Bottom Line

Employment accelerated and helped trigger a surge in consumer spending and economic growth over the summer. Lower inflation and more savings helped. We still believe the Federal Reserve is done with rate hikes, with the bond market now doing the heavy lifting for the Fed. However, this data suggests that the even "higher for longer" mantra for the Fed will hold; stronger growth justifies higher rates. The acceleration in growth will also keep the Fed concerned it could backslide on the progress made on inflation. Don't hold your breath on rate cuts.

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Diane C. Swonk
Chief Economist, KPMG US

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