A Tale of Two Surveys

The latest U.S. employment report presented a conflicting picture of the labor market, as stronger-than-expected job growth was overshadowed by a surprising jump in the unemployment rate to a four-year high. This mix of data has created a dovish market reaction and new uncertainty for policymakers.

On one hand, the Establishment Survey showed a solid gain of 119,000 jobs in September, comfortably beating the consensus estimate of 51,000. Despite downward revisions for previous months, the report was bolstered by a strong survey response rate, giving confidence that the September gains won’t be revised away. It also marked the first net job creation since April for private industries outside of health and social assistance.

On the other hand, the Household Survey pointed toward a loosening labor market. The unemployment rate climbed to 4.44%, its highest level since October 2021 and above the 4.3% consensus expectation. While this coincided with a rise in workforce participation, other metrics continued to indicate soft labor demand.

The Federal Reserve’s Conundrum

This conflicting data creates a challenge for the Federal Open Market Committee (FOMC). Committee “hawks” will likely view the expectation-beating payroll gains as evidence that the economy doesn’t warrant further easing just yet. Meanwhile, “doves” will see the rising unemployment rate as a significant risk to the labor market that justifies a more cautious stance.

With no additional payroll data available before their December 9-10 meeting, FOMC policymakers will have to navigate a data “fog.” They must rely on alternative measures to gauge the labor market’s trajectory and decide if a risk-management rate cut is necessary. While recent data doesn’t suggest the bottom is falling out of the market, it also doesn’t show significant improvement.

In the wake of the report, some analysts shifted their expectations for the December meeting from a cut to a hold. This sentiment was slightly at odds with the market, where the implied probability of a rate cut actually increased from 6 to roughly 9-10 basis points.