That Escalated Quickly

September Payrolls Topple Expectations with Strongest Growth Since January

As we wrote earlier this week, the markets have gyrated this week as blistering job opening data arrived on Monday, and cooler employment data on Tuesday. Given the inconsistency of the two data prints, we awaited this week's payroll data from the Bureau of Labor Statistics to opine on how the prospects of imminent recession and an increase in benchmark interest rates are shaping up. Private employers added 336,000 new jobs in September, more than double consensus forecasts.

September's strong jobs growth defies expectations and continues months of impressive gains

Economic growth by most measures remains robust. The New York Fed estimates growth to be clocking in at 1.83%, which is obviously positive, but less obviously is nearly identical to the average since the Global Financial Crisis. It's also in line with most forecasts for potential growth over the next decade, if not a little lower. Growth at this rate would not generate excess inflation.

Over at the Atlanta Fed, GDP Nowcasts are forecasting 4.9% growth, which is down from the last reading of nearly 6%. That level of growth is likely above the long term potential growth rate of the US Economy, and would spell excessive inflation.

The Atlanta Fed has been very optimistic of late

The truth likely lies somewhere in between: growth that is probably not too far off from long term potential growth, and so not highly inflationary. What is certain is that these figures do not point in the direction of imminent economic contraction. Since we receive some indicators that paint one picture, and others that paint one entirely different, it is useful to use a diffusion index to help clarify the waters. The Chicago Fed runs a few of these, but we'll check in on the National Activity Index, which captures the state of affairs rather perfectly.

The data prints skew slightly to the downside, but are essentially even

The sum of data over the last couple of measurement periods have registered very slightly negative, which would point toward a slight deterioration in conditions. Nonetheless, the index hovers just below zero, so it is just about as likely that things are improving. As we know from pre-election surveys, it is hardest to make forecasts when differences are small and clustered about the mean.

Lastly, using a measure of core inflation that excludes the distorting effects of imputed rents, CPI for all items in the United States has increased from our last reading of 1.7% to 2.5%, which reflects the recent increase in energy prices. Were it not for the recent spike, inflation would remain below the Federal Reserve's target, and indicate that the economy is growing at or near its long-term potential.

Not so far off from where we need to be

On balance, the picture is one of moderate growth heading into the fourth quarter, and a potential rate increase, the odds of which are currently estimated to be 3 in 10.