Main Street Macro: Wages and hiring: It’s not as simple as you think.


Main Street Macro: Unraveling clues to the job market

October 09, 2023 | read time icon 5 min

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Occasionally, I like to leave the comfort of my Main Street and take a tour of the economy to see how other neighborhoods are faring.

One place that got my attention last week was the bond market. Last week, bond market investors were scrutinizing the job market for clues to determine whether the Federal Reserve will continue to raise interest rates this year. 

It reminded me of one of my favorite television shows, Columbo. Popular in the late 1970s, it featured a rumpled and seemingly distracted detective who turned over every clue, no matter how small, to solve the case. Columbo was not a classic whodunit: The first 15 minutes of every episode revealed the crime. What made Frank Columbo compelling was how he solved the case.

 In the same way, how the bond market solves the case of rising rates is (almost) as interesting as the big reveal itself.

The mystery: Job market trends

Jobs data is the most closely watched of all clues to future economic performance. Last Wednesday, the ADP National Employment Report, which is based on the payroll data of more than 25 million U.S. workers, showed that the private sector created 89,000 jobs in September.

Two days later, government data based on a monthly survey of 122,000 businesses and government agencies showed that the economy produced 263,000 private-sector jobs. With government hiring added, the country’s total number of job gains was 336,000 in September, according to the Bureau of Labor Statistics.

Given the differences in the underlying data, these independent measures of the job market are expected to differ in any given month. Over time, however, they’re pretty consistent.

The three-month average of ADP’s National Employment Report shows that employers created nearly 193,700 private-sector jobs during each month of the second quarter. The BLS three-month average shows private-sector gains of 195,000 jobs per month during the same period.

While job gains have trended lower the past three months compared to earlier in the year, the mystery facing investors now is whether the job market is heating up or cooling down.

A clue: Bond yields

Bond market investors are the Columbos of the financial market, deciphering every piece of data for clues to what the Federal Reserve will do next. As investors pored over last week’s jobs data, the trail pointed to at least one more Fed rate hike this year.

But, like Columbo, the puzzle is less about what they find out, and more about how they solve the mystery. That’s because their actions directly affect Main Street.

Yields on the 10-year Treasury hit a 16-year high last week, reflecting bond market worries that the Fed will keep interest rates high, or raise them even more, to tamp down economic growth and tighten the reins on inflation.

That high yield was the result of bond market mystery-solving. We care about the 10-year Treasury because it’s the benchmark used to price a lot of Main Street lending products, including mortgages, car loans, and student loans, repayments on which restarted this month.

Another clue: Wages

Main Street residents aren’t just bystanders in the job market, they’re active participants, and they’re giving investors big clues on the direction of the labor market and Fed policy. 

As ADP reported last week, most of September’s job gains were produced by Main Street’s engine of growth, small businesses. With Main Street still supporting the economy, recession isn’t threatening yet.

Main Street also provided investors a hot tip on the direction of inflation. Last week’s reports from ADP and the BLS both showed that wage growth continues to decelerate. 

ADP’s Pay Insights Report, a companion to our monthly National Employment Report, tracks what individuals across the United States are paid. Year-over-year pay growth has been slowing over the past 12 months for both job stayers and job changers.

In September, this trend continued across almost all of the United States, with year-over-year pay gains shrinking in 43 states from August to September.

Steadily decelerating wages are a strong sign that the job market won’t become the villain in our Fed mystery. The dreaded inflation-fueling wage-price spiral feared by economists has yet to materialize in this thriller. If inflation continues to moderate, investors might have stumbled on the best-possible resolution to the mystery of the economy: Real wages that grow and a Main Street that continues to support economic growth.