Americans are still spending. Friday’s jobs report will show if that can last

By Alicia Wallace, CNN

(CNN) — Americans have kept spending despite more than five years of higher prices. But the paychecks that have powered that spending are starting to lose steam.

Friday’s jobs report could show how much further pay gains are falling behind inflation.

The continued resilience of spending, which powers two-thirds of US economic growth, has been attributed to several reasons – mostly gains in wealth, but also demographics, post-pandemic savings, inflation effects, and a robust stock market – but a crucial factor has been the relative stability of the labor market.

“Having a job enables confidence to keep spending despite inflation headwinds,” Kathy Bostjancic, chief economist at Nationwide, noted on Wednesday.

Job growth has improved from last year and unemployment has remained low. However, there are vulnerabilities lurking in this “low-hire, low-fire” labor market: Notably, the paychecks that power that spending are losing their fizzle.

Rising inflation adding ‘insult to injury’ for US workers

As a result of the energy shock spurred by the US-Israeli war with Iran, inflation has outpaced pay growth for five months running. That’s expected to extend to six when the September jobs report is released Friday.

“The rebound in inflation is coming at an unfortunate time, because it’s being married with a slowdown in wage growth as the labor market cools,” said Daniel Zhao, chief economist at Glassdoor. “It’s really adding insult to injury for workers at a time when their raises are getting smaller and their benefits are being cut, too.”

Average hourly earnings, a closely watched measurement of workers’ pay changes, is expected to rise 0.3% in September, which could bump up the annual rate by 0.1 percentage point to 3.2%.

That’s roughly in line with wage growth seen right before the pandemic; however, inflation (3.4% now) was a different animal then (2.3%). Inflation also likely heated up further in September, rising to 3.6%, according to the Federal Reserve Bank of Cleveland’s inflation projections. Some economists expect an even higher rate.

“Wage growth is moving in the wrong direction as inflation is also moving in the wrong direction,” Zhao said.

What to expect from Friday’s report

The US economy doesn’t need to add as many jobs as it once did to keep unemployment steady. The labor market is undergoing a structural shift as a result of an aging population, increased retirements from Baby Boomers, and a reduction in net immigration.

And in September, job growth likely was solid enough to stay the course. Economists project that employers added 94,000 jobs and that the unemployment rate held at 4.1% for the third month in a row. If the payroll gains come in as forecast, it would mark a slowdown from the stronger-than-expected 162,000 jobs added in August.

Volatility in monthly jobs data

Monthly economic data usually is quite volatile; however, the jobs reports this year have delivered a whipsaw effect (the biggest being a 370,000-job swing from February to March).

The choppiness can be attributed to a variety of factors, including extreme weather; labor strikes; methodological calibrations; shifts in hiring patterns; as well as quirks in the seasonal adjustment process (a methodology to better see employment trends by removing the influences of predictable or recurring patterns from the likes of weather, holidays, school schedules).

“August payrolls benefited from a far more favorable seasonal adjustment than ’25 and ‘24,” Bank of America economists wrote in a note last week. “This raises the risk of September payback in seasonal factors, which could be more or less punitive than what we are penciling in.”

Industries beyond healthcare are adding jobs

Seasonal factors aside, August’s jobs report and the following weeks’ labor market data point to underlying strength, Bank of America economists noted, flagging broadening job gains and continued low layoff activity.

In August, the variety of industries that added jobs was the widest in nearly two years, BLS data shows.

Healthcare, buoyed by an aging population in need of more medical services, has driven much of the employment gains in recent years.

That’s expected to continue in September; however, industries such as construction (boosted by data center investment); professional and business services (boosted by temp help and technical industries); and logistics and transportation (boosted by a sharp rise in goods imports), also could post stronger gains, BofA economists noted.

That broader hiring effort was on display in ADP’s latest monthly employment snapshot, released Wednesday, which showed a pickup in private-sector job gains for the first time in three months. Employers added an estimated 90,000 jobs in September, the payroll firm reported.

ADP’s monthly estimates don’t always directly correlate to the official jobs report numbers; however, the private-sector hiring report is closely watched as an indicator of the labor market’s trajectory.

Layoffs are low but caution is high

Layoff activity hasn’t picked up speed, according to the Labor Department’s weekly reports on unemployment insurance filings. Initial jobless claims have remained muted, while continuing claims for benefits are at their lowest level in more than three years, new data showed Thursday.

Companies also aren’t signaling plans to drastically cut more jobs. In September, US employers announced plans for 43,281 layoffs, down 18% from August and 20% from last year, according to a report released Thursday by Challenger, Gray & Christmas.

“Companies are in a wait-and-see period right now,” said Andy Challenger, chief revenue officer at the outplacement firm.

He noted that the typical surge in seasonal hiring announcements hasn’t occurred this year, suggesting employers are taking a cautious approach.

The low trend in layoffs is expected to be maintained through the end of the year; however, claims could pick up next year as a result of higher interest rates and the growing adoption of artificial intelligence technologies by businesses, Pantheon Macroeconomics economists wrote Thursday.

A ‘calm but fragile’ state

The labor market also is facing plenty of headwinds.

“Employers are facing high energy costs, an uncertain war in Iran, a rate hike that could make hiring more expensive, plus the likelihood of surging healthcare costs,” Challenger said, noting expectations that health costs and spending could increase for businesses in 2027.

Plus, the “low-fire, low-hire” environment puts the labor market in a more vulnerable, “calm but fragile” position, researchers for the Kansas City Fed wrote Wednesday.

“In a healthy labor market, low unemployment derives from both a relatively low job loss rate and a relatively high job-finding rate,” the researchers wrote. “When low unemployment is driven by a low job loss rate alone, however, the labor market may be more fragile than it initially appears.”

TPS changes could affect 200,000 workers

The Trump administration’s late-July suspension of Temporary Protected Status for Haitian immigrants has not yet shown up in the payroll data, BofA economists noted.

An estimated 200,000 Haitian TPS holders were in the US workforce, primarily in industries such as healthcare, restaurants, transportation, warehousing and retail trade, according to the note.

Employers, workers now have to contend with higher rates

September’s jobs report could also start to show some ripple effects of the Fed hiking rates for the first time in three years, said Nicole Bachaud, ZipRecruiter’s labor economist.

Employers and workers alike have already been showing hesitancy as a result of big policy shifts, heightened geopolitical tensions and structural changes in the labor market, she said.

“We’ve seen a lot of this breath-holding, walking on eggshells, stagnation taking place across the market,” she said, noting that the impacts and expectations of higher interest rates could further dampen hiring and make workers less apt to change jobs.

“Typically, when we see interest rates going up, we see job growth slowing a bit, and we haven’t been on a strong, upward trajectory; so, it’s not like we’re slowing off this nice, upward curve,” she said. “We’ll likely see some sort of reversal from the August gains to something more muted.”

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