Economic Update | Is the Weak Jobs Report an Early Signal?

–And Consumers Power Ahead 

submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast

The U.S. economy saw the smallest monthly gain in payrolls since 2020.  The BLS monthly employment report showed that payrolls increased by only 12,000 in October, significantly under the 112,000 that was expected. The unemployment rate remained flat at 4.1%. Two hurricanes, including one that occurred during the survey reporting period, along with a major Boeing strike, were cited as possible reasons for the overall weak number. Given the uncertainty, this is not necessarily a signal for a broader slowdown in the economy. We should treat it as a one-off and wait until the next employment report for additional hints of a developing trend. 

Here are some of the reasons why the weak employment number is not part of a broader slowdown. First, we can look at weekly unemployment claims. In the past two weeks, unemployment claims have continued to decline and have come in under consensus estimates.  Last week, claims were at a very low 216,000, which is well under any level associated with a weakening economy.  Secondly the ADP Report, a labor report produced by the private firm ADP on the Wednesday before the BLS report, showed that the nation added 233,000 jobs, well over the consensus of 104,000.  The ADP report is historically volatile and there is debate around its usefulness. Nonetheless, it is a data point, and one that does convey some information about the labor market. Finally, the consumer continues to be resilient.  Making up 2/3rds of the U.S. economy, the consumer continues to drive economic growth. Recent consumer surveys showed increases in consumer optimism, and the latest report on consumer spending showed healthy gains.   

A strong economy was evident with the latest GDP report.  The preliminary report on GDP showed that gross domestic product increased by 2.7% over the prior year, higher than the consensus estimate of 2.5%. Over the quarter, growth was 2.8%, and of the 2.8%, consumers contributed 2.46 points out of the 2.8%. Consumers drove growth in the third quarter, and with rising consumer sentiment numbers, there are no noticeable signs of a consumer slowdown just yet. 

On the inflation front, the Fed’s preferred inflation gauge, the core PCE price index, was a little hotter than expected and above the Fed’s target of 2%. While the Fed has made tremendous progress in driving the inflation rate down, it remains elevated and above target. As we mentioned in the last update, after the Fed’s unexpected cut of ½ percent, the 10-Year Treasury started climbing, and last week, saw additional gains, closing at 4.4%, and up from 3.7% just a few weeks ago. The yield closed higher after the dismal employment report, suggesting that bond participants were not pricing any significant slowdown due to the weaker jobs report. Market participants continue to price two additional rate cuts, but we can likely expect the pace to slow.    

Higher interest rates will continue to impact interest rate sectors like manufacturing, and the latest employment report showed a decline of 46,000 jobs. The ISM Manufacturing Index showed continued contraction in the sector, with the index coming in at 46.5, lower than expected. Slower manufacturing has had an impact on manufacturing intensive states like Indiana and Kentucky, with slower payroll gains and unemployment rates that exceed the national average.   

There had been increasing doubt about remaining Fed cuts this year, due to sticky core inflation and robustness of the consumer.  The weak jobs report sealed the deal for the case for cuts remaining this year. As we go into 2025, expect the pace for cuts to slow and become more uncertain.