The US job market continues to defy expectations, showing far more strength than many observers anticipated. For months, the general sentiment among economists and market watchers was that the labor market was gradually cooling off, potentially leading to slower economic growth. However, the latest jobs report from the US government tells a different story, painting a picture of robust job creation and a decline in unemployment. This surprising report is likely to shift investors’ outlook on the economy and could reshape expectations for Federal Reserve policy. Let’s dive into the key details.

Job Growth Soars, Defying Predictions

The US government produces two major employment reports: one based on surveys of businesses (establishment survey) and another based on household surveys. According to the establishment survey, the US economy added 254,000 new jobs in September 2024, the highest monthly increase since March and a figure that far exceeded expectations.

Here’s a breakdown of where the jobs were created:

• Construction: +25,000 jobs
• Retail: +15,600 jobs
• Professional Services: +17,000 jobs
• Health Care & Social Assistance: +71,700 jobs
• Leisure & Hospitality: +78,000 jobs
• State and Local Government: +29,000 jobs

While most industries experienced gains, manufacturing saw a decline in employment. Additionally, average hourly earnings increased by 4% compared to a year ago, marking the strongest wage growth since May. This uptick in wages, despite falling inflation, indicates a tightening labor market, which could cause some concern for the Federal Reserve if productivity does not rise at a similar pace.

Unemployment Falls for a Second Month

The household survey, which also tracks self-employment, revealed that employment grew almost three times faster than the labor force, leading to a drop in the unemployment rate. The rate fell from 4.2% in August to 4.1% in September, marking the second consecutive month of decline. This trend is a clear sign that the US economy continues to gain momentum, even as other areas of the world experience economic sluggishness.

How Will the Fed Respond?

The implications of this strong jobs report for the Federal Reserve are significant. Before the report was released, futures markets predicted a 68% chance of a 25-basis-point interest rate cut at the Fed’s November policy meeting. After the release, that probability shot up to 94%, with investors betting that the Fed will opt for a more gradual approach to rate cuts, particularly in light of accelerating wage growth.

Fed Chair Jerome Powell has hinted at a cautious strategy for reducing interest rates, signaling that future cuts are likely to be smaller—25 basis points—compared to the sharper cuts seen earlier in the year. This cautious approach aligns with the Fed’s goal of achieving a “soft landing,” where inflation comes down without sparking a recession. But as this jobs report shows, the landing might not be as soft as initially thought.

Inflation Expectations Ticking Up

Another key takeaway from the jobs report is its impact on inflation expectations. The 10-year breakeven rate, a key measure of bond market expectations for future inflation, has ticked up in recent weeks. On September 10, 2024, the breakeven rate stood at 2.02%. By October 3, it had risen to 2.21%, the highest level since July. This suggests that investors are starting to revise their inflation forecasts upward, based on the strength of the US economy. Yet, they still expect inflation to remain relatively low, even with the stronger job market.

Consumer Spending and Income Growth Stabilize

In parallel, the consumer side of the US economy also showed signs of stabilizing. In August, both real disposable income (income adjusted for taxes and inflation) and consumer spending grew by 0.1% compared to the previous month. This modest growth indicates that consumers are returning to more normal spending patterns after a period of significant economic disruption. Interestingly, the increase in spending was driven entirely by a rise in service consumption, with no change in spending on goods.

Global Economic Outlook: Mixed Signals

While the US economy is humming along, the global picture is more mixed. In the eurozone, inflation has finally fallen below the European Central Bank’s (ECB) 2% target, hitting 1.8% in September, the lowest in three years. This has prompted the ECB to begin cutting interest rates, although cautiously, due to lingering concerns about inflation. The Eurozone economy remains fragile, with bond yields falling and equity prices under pressure.

Meanwhile, the manufacturing sector globally is facing significant headwinds. The global purchasing managers’ index (PMI) for manufacturing fell from 49.6 in August to 48.8 in September, indicating a continued contraction in industrial activity. Major economies like Germany, Japan, and China are experiencing sharp declines, while only a few, like India, show signs of growth.

What Lies Ahead?

As the US job market remains unexpectedly strong, it raises important questions for policymakers and investors. Will the Federal Reserve continue with its cautious approach to interest-rate cuts, or will persistent wage growth force them to rethink? And how will global economic weakness impact the US in the long term? One thing is clear: The US economy appears more resilient than many expected, and the road ahead might be a bit bumpier—but still largely moving in the right direction.