Tonight’s Non-Farm Payroll May Release Anti-Inflation Signals: Employment Expected to Rebound, but Wage Growth Could Drop Below 3% for the First Time in Five and a Half Years

According to Zhitong Finance APP, U.S. non-farm payrolls may have rebounded in October, but wage growth is expected to slow to below 3.0% for the first time in nearly five and a half years, reinforcing the view that the labor market is not a source of inflation. The highly anticipated employment report to be released by the Department of Labor on Friday is also expected to show that the unemployment rate remained unchanged at 4.2% last month, and most likely has fallen to 4.1%. Historically low layoffs and a recent surge in job openings have increased the likelihood of a tightening labor market.

However, economists and Federal Reserve officials insist that the labor market does not pose an inflation risk. Some economists believe that shrinking labor supply—due to tighter immigration policies and waves of retirements—is the main reason for the relatively low unemployment rate.

James Knightley, Chief International Economist at ING, said: “Our labor market is not generating wage growth in any meaningful way. This should indeed help keep medium-term price pressures in check, since labor is the biggest input cost for U.S. businesses. Weak wage growth should give the Fed some confidence that medium-term inflation will continue to trend toward target.”

Economists surveyed expect non-farm payrolls to have increased by 65,000 last month, compared with just 29,000 in September due to a late Labor Day calendar effect. The forecast range is from 35,000 to 125,000.

October's job data may also underperform expectations, as some economists point out that the seasonal adjustment factors used to smooth data for fluctuations may have worked against the month.

So far this year, job numbers have increased by an average of 68,000 per month. Economists say the economy needs to create at least 40,000 jobs monthly to keep pace with the growth of the working-age population. Due to a shrinking labor force, the so-called breakeven rate has dropped from around 150,000 in 2024.

Employment growth is lagging behind economic growth. Driven by strong consumer spending and heavy corporate investment in AI, U.S. GDP grew at an annualized rate of 3.4% in the third quarter. Economists state that employers may have over-hired post-pandemic, and some companies may not be certain about their staffing needs as they incorporate AI into operations.

They also note that the wars involving the U.S., Israel, and Iran have driven up energy prices, prompting uncertainty that makes employers hesitant to add staff. Limited opportunities have made job-hopping more difficult, thus suppressing wage growth.

Limited Opportunities for Job Seekers

Youth, recent college graduates, and some unemployed workers are also finding it difficult to secure jobs.

Disappointment in the economy and anger over the ongoing nine-month Middle East conflict have led the Republican Party, led by President Trump, to lose control of Congress, while the Democrats performed strongly in this week’s midterm elections.

Gregory Daco, Chief Economist at EY-Parthenon, said: “For employees who already have jobs, job security remains relatively high, while opportunities for job seekers and job switchers have become much more limited. More broadly, the economy has shifted into a ‘soft employment expansion,’ as investment leans toward technology and companies rely more heavily on existing staff to meet robust demand, evident in firmer working hours.”

Average hourly earnings are expected to grow 0.3% in October after a modest 0.1% advance in September. Over the 12 months ended October, wages are projected to have risen 2.9%. This will be the first year-over-year increase below 3% since May 2021, further slowing from 3.0% in September.

While this underscores the disinflationary effect of the labor market, it also points to further erosion of household incomes that have already been under pressure from inflation.

Inflation- and tax-adjusted disposable household income declined in September.

Economists expect consumer spending and the overall economy to slow in the fourth quarter and into 2027. They still anticipate the Fed will raise rates in December, but some believe moderate wage pressures could limit the number of hikes next year. The Fed kept its benchmark overnight interest rate at a range of 3.75% to 4.00% last week, while acknowledging that inflation “remains elevated.”

The October Consumer Inflation Report, to be released next Tuesday, could provide more clues for the trajectory of monetary policy in early 2027.

Stephen Stanley, Chief U.S. Economist at Santander US Capital Markets, commented: “The labor market is neither too hot nor too cold. Therefore, in terms of labor conditions, the Fed has nothing to worry about.”