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Research Recap | Signs of softening in the October jobs report

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Michael Feroli, Chief U.S. Economist, and Samantha Azzarello, Head of Content Curation and Strategy, discuss the October payrolls report.


SAM AZZARELLO: Welcome to Research Recap. My name is Sam Azzarello, and I lead Content Strategy for Global Research here at J.P. Morgan. I’m joined today by Michael Feroli, our Chief U.S. Economist, to talk about the October jobs report. So, Mike, we’re going to start where we always start, which is high level. Do you want to highlight some key numbers from the report and your observations of the state of the labor market at the moment?

MICHAEL FEROLI: Yeah. So we had 150,000 job gain last month, which was pretty close to expectations. However, I think when you dig into the numbers a little bit, it actually shows a decent amount of softening in labor market activity. Job growth was really driven by local government hiring and health care, so two not very cyclically sensitive sectors. The rest of the economy, you’re seeing pretty good slowing in job growth. You’re also seeing decline in the average workweek. You’re seeing less breadth in overall hiring. And so I do think it’s consistent with an economy that looks like it’s slowing down.

SAM AZZARELLO: OK, so as a corollary question, the uptick in the unemployment rate. Walk us through if that means anything broader about the trend of the labor market.

MICHAEL FEROLI: Yeah. So the unemployment rate, as you mentioned, ticked up to 3.9%. It was 3.4% earlier this year at the low. So we’ve had a half-point move up. You know, you might not want to make too much of a big deal out of one month’s move, but we have seen a pretty consistent trend higher here. And I think you’re seeing that slack opening up in other measures. So you’re seeing the U-6 measure, which also includes other pockets of underemployment. That also moved higher. So I do think you’re seeing a labor market that’s looking a little less tight than it did several months ago.

SAM AZZARELLO: OK, so then let’s turn to wage growth, which we know is an important input for the broader inflation outlook. ECI, the Employment Cost Index, earlier this week came in firmer, while the jobs report today showed that average hourly wages were up 0.2%, which some could say is on the softer side. I wanted to ask you, I guess, about that divergence, and which indicator do you put more weight on?

MICHAEL FEROLI: So keep in mind that the ECI was for the third quarter. And October is, of course, the first month of the fourth quarter. That being said, I think when you look at the broad trends on a year-ago basis, both very consistent, both showing wage growth in the low 4s, which is pretty good, which is actually something — a year or two ago, we were running more like the high 5s on both of those measures. So this is probably something that’s a little more consistent with a stable inflation environment.

SAM AZZARELLO: OK. And then the final question. Given that there is a mosaic of data that comes out around the labor market, and we’ve seen revisions, you’ve told us broadly where you think the labor market’s going. I guess I just want to ask, implications for the Fed. Does anything change for the outlook from here?

MICHAEL FEROLI: So I think earlier this week, we had an FOMC meeting. And Chair Powell sounded pretty content to be on hold. And I think this really validates that they are going to be on hold, barring some big surprise between now and the next meeting at December. And overall, this looks consistent with the soft landing message of an economy that is slowing down and maybe, hopefully, not slowing too fast. So we do think this is consistent, again, with the Fed being on hold, not just in December but for several months.

SAM AZZARELLO: Thanks, Mike, for joining us on Research Recap. Looking forward to talking to you again next month. And thank you to our listeners for tuning in. For more research insights, visit jpmorgan.com/research.


| 03:38

Unpacked: Debt ceiling

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

| 03:38

Unpacked: Debt ceiling

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

Just like individuals who apply for loans, countries receive credit ratings. These are called sovereign credit ratings and they indicate the likelihood of governments paying back their debt.

For years, the United States received the highest possible credit score, a triple-A sovereign credit rating from all three rating agencies. This showed that U.S. debt was a low-risk investment.

But in 2011, Congress delayed raising the debt ceiling. This brought the government close to default. The country’s credit rating slipped to double-A plus for the first time in history.

So, what is the debt ceiling, and why is it so important?

This is the Debt Ceiling: Unpacked.

Every year, the U.S. Congress agrees on a budget for government spending on products and services such as the military, national parks and Social Security. It also sets taxes to pay for these expenses. Managing the flow of money — collecting taxes and distributing funds — then falls on the U.S. Treasury.

A deficit is when tax revenue is less than government spending. When this happens, the Treasury needs to make up the difference. It borrows money by selling Treasuries to investors like U.S. citizens, pension funds and foreign governments.

The debt ceiling is the limit on how much the treasury can borrow. Despite this limit, Congress can approve a budget with a deficit that’s more than the debt ceiling. To do this, it must also vote to raise the ceiling to cover expenses.

The first debt ceiling was established in 1917, when Congress passed the Second Liberty Bond Act. Before then, Congress had to approve every bond issuance. When the U.S. entered World War I and war bonds were needed to support military efforts, this system became slow and difficult.

With a debt ceiling, the Treasury could act independently while remaining accountable to Congress.

If the debt ceiling is reached, the Treasury has a few options. It can use existing cash, prematurely redeemed Treasury bonds, and halt contributions to government pension funds.

When options run out, the government declares a sovereign default. This means it can’t repay its debts because of a lack of resources or willingness to do so.

To date, Congress has always avoided default by raising the debt ceiling. If it doesn’t, essential services such as public health and security would be interrupted, and the United States’ global reputation would be damaged. This could lead to foreign investors dumping securities, the dollar’s value dropping and markets experiencing heightened volatility.

With so much risk to both the local and global economy, is there an alternative to the debt ceiling?

Yes. In fact, most western nations don’t have a fixed debt ceiling — the U.S. and Denmark are the only ones that do. Some other countries use a “debt brake.” In this system, national debt must stay under a certain percentage of gross domestic product. If the economy grows, the country can borrow more and vice versa.

Today, the U.S. faces an increasing budget deficit. From the COVID-19 pandemic and rising inflation, the debt ceiling will undoubtedly come under further scrutiny — especially if the U.S. wishes to maintain its reputation as a strong investment environment.