September employment preview: signs of slowing momentum

 We expect nonfarm payrolls to increase by +270k in September, a solid
number that indicates continued tightness in the labour market, though
it would also point to slowing momentum compared to the scorching
recent pace, which has averaged +438k so far this year.
 Looking ahead, we expect relatively firm hiring to be maintained for the
time being, though look for the trend pace to slow back towards 200k in
the coming months as Fed tightening continues to put the brakes on
economic activity.
 In line with the solid projected NFP print, we look for the unemployment
rate to come in unchanged at 3.7%. The unemployment rate may improve
a bit further in the near term, but it looks to be close to, if not at, a low,
and we expect it to tick modestly higher towards the end of the year.
 We project average hourly earnings (AHE) to rise 0.4%MoM,which would
result in the YoY pace ticking down to 5.1% from 5.2%. Earnings growth
is elevated and should remain so, though we currently believe that we
are near or just past a peak.
 While we continue to expect that the Fed’s reaction function will remain
tilted towards inflation, signs of continued labour market tightness
would only add to the pressure the FOMC is facing. If Friday’s report
does print in line with or above expectations, it would likely support the
Fed sticking with 75bp for one more meeting in November. However, the
downside surprise in the JOLTS report does keep the door ajar for a
switch to 50bp, and additional downside surprises in Friday’s report and
next week’s September CPI report could prompt a downshift to 50bp.
 In a focus section, we take a look at the possibility that long Covid has
been a major contributor to the shortfall in labour force participation,
with some studies estimating that long Covid could be keeping up to 4m
people out of work. However, in looking at state level data, there is
essentially no correlation between long Covid rates and the recovery in
participation. As such, while we would not argue that long Covid has had
no impact, we do not see it as the major driver of low participation.

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