Weak Hiring Fuels Stagflation Worries

The September employment report strengthens the case that the US economy is moving toward stagflation, with weakening labor demand, slowing wages and persistent inflation.

• US non-farm payrolls increased by only 29,000 in September versus 90,000 expected; private employers added 46,000 jobs while government employment fell by 17,000.
• Previous payroll figures were revised down by a combined 60,000: August was reduced to 133,000 from 162,000, while July was revised to a loss of 10,000 jobs.
• Average hourly earnings rose 0.1% month over month and 3% year over year, down from 3.5% year-over-year growth in June and below August headline CPI inflation of 3.4%.
• Healthcare added 17,000 jobs, well below its 33,000 twelve-month average; construction, leisure and hospitality, and manufacturing gained 11,000, 10,000 and 9,000 respectively, while information, professional and business services, and financial activities lost 10,000, 9,000 and 7,000.
• Markets initially treated weak hiring as positive because it makes an October Federal Reserve hike unlikely, but fiscal sustainability concerns should continue to push long-term rates higher, albeit potentially more slowly in the near term.

Takeaway: Investors should treat stagflation as a larger risk than consensus appears to assume, while recognizing that this conclusion is based on a single employment report and that fiscal concerns remain an independent source of upward pressure on long-term yields.