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Labor growth slowing down but not stalling out

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      By Andrew Szczurowski, CFAPortfolio Manager, Global Income Group, Eaton Vance Management

      Boston - While the pace of employment growth has clearly slowed from last year, job gains haven't stalled. The U.S. economy added 136,000 to the payrolls in September, according to the Bureau of Labor Statistics establishment survey - just a bit below economists' estimate of 145,000.

      Balancing this slight miss on the headline number, upward revisions of 45,000 jobs to the prior two reports brought the three-month average down from 171,000 to 157,000 per month.

      The good news was that the unemployment rate fell from 3.7% to a 50-year low of 3.5% for the right reasons. According to the much more volatile household survey, 391,000 jobs were added in September while the labor force participation rate held steady at 63.2%.

      The U.S. Federal Reserve (Fed) has to deal with a bond market that is pricing in a recession, and a trade war that could last for months or years. By contrast, this data release continues to show a labor market slowly removing slack. That makes the Fed's job a bit trickier.

      Wage growth disappoints

      The big negative in the September employment report was the lack of wage growth, as average hourly earnings were flat month-over-month, pulling year-over-year wage growth down to 2.9% from 3.2%. Coming off three previous months of stronger wage growth, we'll have to see over the next few months whether this concerning trend continues, or September's weak number was just a one-off miss. If the Fed does indeed wish to cut rates again this year, the lack of higher wage pressures - even with a 3.5% unemployment rate - would give them cover.

      Hiring by sector mixed

      Getting into the sector breakdown, anyone following the evolution of the economy won't be surprised that retail trade lost 11,000 jobs in September, for a total of 78,000 jobs shed from stores this year. But with death comes rebirth: As many of us now do the bulk of our shopping online, we've seen more jobs created in warehouses and among couriers, which added a combined 7,000 in the September report.

      Employment in the manufacturing sector continues to experience casualties from the trade war, with another 2,000 jobs lost in September. This year's manufacturing payrolls have averaged just 5,000 new jobs per month, after last year's resurgence added 22,000 jobs per month. The 46,000-worker strike at General Motor wasn't a factor in this report, but if it drags on for two more weeks, we'll see a negative impact next month.

      By contrast, the healthcare sector has been the source of the U.S. economy's most positive employment gains, adding 39,000 jobs in September and 423,000 jobs over the past year. All those aging baby boomers will likely require more health services, so I think the future looks bright for the sector - until we figure out how to stop getting older.

      Census workers coming

      One other highlight is that only 1,000 census workers were hired in September. Some economists had estimated this could be as high as 20,000. So those census jobs will likely show up in the coming months.

      Bottom line: Like many other parts of the U.S. economy, the labor market seems to be deteriorating, if only slightly. Consumers have been the bright spot in the economy, pulling more than their weight this year and building up healthy reserves of savings. But even consumer confidence has taken a hit recently from tariffs and the trade war. Over the next few weeks before Fed policymakers meet at the end of October, we'll be watching whether we get a further deterioration of economic data.