U.S. September Jobs Report Soars Past Expectations

Executive summary:

  • In a show of labor-market strength, the U.S. economy added 254,000 jobs in September
  • The U.S. services sector also reported strong growth
  • Consensus expectations are for Q3 earnings of around 5%-6% for the S&P 500

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin examined the current state of the U.S. economy and outlined key investor watchpoints ahead of third-quarter earnings season.

U.S. hiring accelerates in September

Lin began by assessing the health of the U.S. economy in light of the September nonfarm payrolls data, released Oct. 4. “This report shows that the sky is certainly not falling,” he remarked, noting that the nation’s economy added 254,000 jobs in the month of September, significantly higher than the consensus expectation for around 150,000 jobs. In addition, he pointed out that there were upward revisions to both the July and August hiring numbers.

The employment report adds to an array of encouraging labor market data points that were released earlier in the week, Lin said, including the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS). The survey showed that U.S. layoff rates remain relatively low and that job openings appear to be stabilizing, he explained.

In light of the economic data, Lin said that markets reduced their expectation for a supersized 50-basis-point (bps) rate cut in November, and instead are now assigning a roughly 85% probability of a 25-bps rate cut by the Federal Reserve (Fed). “The market’s expectation for a 25-bps rate cut seems reasonable,” Lin remarked, adding that Fed Chair Jerome Powell previously indicated the central bank is “not in a rush” to cut interest rates.

In a base case soft-landing scenario, Lin believes the Fed will likely cut interest rates by 25 bps at each meeting going forward, until interest rates get to around 3%. However, he also emphasized that macroeconomic uncertainty continues to remain elevated, and that a soft landing is not the only possible outcome.

U.S. services sector also expands at faster-than-anticipated pace

Next, Lin turned to two key leading economic indicators released by the Institute for Supply Management (ISM). He said that these reports continued to show a divide between a robust services sector and a weaker manufacturing sector.

Lin explained that the ISM’s non-manufacturing PMI (purchasing managers’ index) rose to a reading of 54.9 last month, versus consensus expectations for a reading of 51.7. A reading above 50 indicates expansionary conditions, while a reading below 50 indicates contractionary conditions. “This was a significant outpacing of expectations in the services sector,” he stated, adding that the new orders and production subcomponents of the index also grew more rapidly in September than in August.

On the other hand, the ISM’s PMI for the manufacturing sector remained in contractionary territory in September with a reading of 47.2, Lin said—matching what was observed in August. While this marked the sixth straight month of contractionary conditions in U.S. manufacturing, Lin explained that it’s important to understand that the U.S. is much more of a services-based economy today. Approximately 75% of U.S. GDP (gross domestic product) comes from the services sector, he said, compared to only about 12% for manufacturing.