September Jobs Report Last Before November FOMC Meeting

The September employment report will be released at 8:30 am ET this morning and it will be the last jobs report before the November FOMC meeting and the expected quantitative easing tapering announcement. That being said, we don’t think the tapering decision hangs in the balance on this report. Unless there is a wide miss in the numbers, the Fed seems intent on getting on with tapering so as to tee-up possible rate hikes later in 2022 and early 2023.  The median Bloomberg expectation is that 500 thousand jobs were created versus 235 thousand in August with the unemployment rate dipping to 5.1% versus 5.2% the prior month. Once again, however, the dispersion of estimates for job growth are quite wide with a low of no change to a high of 750 thousand which adds an element of uncertainty.

Earlier this week, ADP reported  568 thousand new private sector jobs beating the 430 thousand expectation and well clear of the 340 thousand added in August.  Both ISM reports for September also posted solid employment readings which adds to the probability of a decent jobs number today, but in the land of predictions nothing is ever certain.

Employment-to-Population Ratio Provides Some Answers to Reaching Maximum Employment

While a tapering decision in November may not hang in the balance for today’s jobs numbers, it will certainly fill in some information as to how fast the labor market is moving towards the Fed’s maximum employment mandate. The Fed has been somewhat vague in identifying particular labor market metrics that it is watching in that regard but one they have mentioned is the Employment-to-Population Ratio. Much has been written about the changing nature of the labor force in the face of the pandemic, with millions of workers dropping out to attend to homeschooled children and/or elderly. The employment-to-population ratio, however, avoids the nuances of labor force calculation that is used in the unemployment rate and can sometimes provide a clearer read on employment trends.


Source: Bloomberg

The ratio (total employed/working age population) can be further refined by looking at distinct age cohorts within the ranks of the employed. One such cohort is called the Prime Age Group, those between the ages of 25 and 54.  By removing the younger aged workers you reduce the variability of those moving into and out of school during the year. By removing the older cohort (55 and over) you reduce the vagaries around early retirement especially prevalent during the pandemic. As the chart shows the current rate is 78.0%, still short of the 80.5% pre-pandemic high but certainly much improved from the 69.6% pandemic low.

The rate started the year at 76.3%, so an improvement of 1.7%, or approximately 2/10ths per month. Thus, getting back to something close to 80.5% may take another year give or take a few months, which would put the Fed pretty close to its target of beginning rate  lift-off later in 2022 or early 2023. Keep an eye on this rate as a possible signal as we move through 2022.

Underemployment Rate Also Signals Mid-to-Late 2022 to Reach Maximum Employment

Another measure the Fed will be watching in determining a return to maximum employment is the so-called Underemployment Rate, or U-6 in BLS parlance. This captures a wider swath of people by including not only the unemployed but also the marginally attached (not working and not currently looking but still wanting a job), and those working part-time for business reasons but wanting full-time work. By including the marginally attached it recognizes those that fell out of the stricter U-3 unemployment definition but would likely return to the labor force when conditions allow.


Source: Bloomberg

As the graph illustrates, the underemployment rate bottomed in December 2019 at 6.8%, peaked at 22.9% in April 2020, and currently sits at 8.8%. Bloomberg does not provide forecasts for this metric so it’s a case of wait and see for September. Getting that rate back in the neighborhood of 6.8% is something the Fed will want, but while dramatic improvements were made early in the recovery it’s likely the final 2.0% needed to return to pre-pandemic levels will become more grudging.

The rate started the year at 11.7%,  so its dropped 2.9% in eight months, or 0.36% per month. This implies a return to pre-pandemic levels could be just six months away. However, the last eight months in 2020 saw the rate drop 9.5% so the law of diminishing returns is evident.   More likely, the declines become more grudging the closer we get to the December 2019 lows. This implies the underemployment rate, like the employment-to-population rate, returns to pre-pandemic levels in mid-to-late 2022, providing another signal to the Fed that maximum employment is nearly upon us and a rate hike lift-off not far behind.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.20 0.51 0.82 1.19 1.98 2.44
0.50 0.19 0.48 0.76 1.08 1.84 2.33
1.00 0.18 0.45 0.73 1.03 1.75 2.20
2.00 0.44 0.67 0.95 1.63 NA
3.00 0.91 1.57 NA
4.00 1.52 NA
5.00 1.49 NA
10.00 NA

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Published: 10/07/21 Author: Thomas R. Fitzgerald