Tonight's nonfarm payrolls may send an anti-inflation signal: job growth is expected to rebound, but wage growth could fall below 3% for the first time in five and a half years.

Note that U.S. nonfarm payrolls for October may have rebounded, but wage growth is expected to slow to below 3.0%, the first time in nearly five and a half years, which would reinforce the view that the labor market is not a source of inflation. The closely watched employment report, due Friday from the Labor Department, is also expected to show the unemployment rate held steady at 4.2% last month and very likely fell to 4.1%. Layoffs remain at historically low levels and a recent surge in job openings has raised the likelihood that the labor market is tightening. But economists and Fed officials insist the labor market poses no inflation risk. Some economists believe that shrinking labor supply, amid tighter immigration policy and a wave of retirements, is the main reason the unemployment rate is relatively low. James Knightley, chief international economist at ING, said: "Our labor market is not generating wage growth in any meaningful way. That really should help contain medium-term price pressures, because the biggest cost input for U.S. businesses is labor. Weak wage growth should give the Fed some confidence that medium-term inflation will continue to fall back toward target." A survey of economists forecasts that nonfarm payrolls may have increased by 65,000 last month, after rising only 29,000 in September due to calendar effects from a late Labor Day holiday. Forecasts range from 35,000 to 125,000. The October employment data may also fall short of expectations, with some economists noting that the seasonal factors the government uses to strip seasonal fluctuations from the data are unfavorable for that month. So far this year, payrolls have averaged 68,000 a month. Economists say the economy needs to create at least 40,000 jobs a month just to keep pace with growth in the working-age population. Because the labor force has shrunk, the so-called breakeven rate has fallen from about 150,000 in 2024. Job growth is lagging economic growth. U.S. GDP grew at a 3.4% annualized rate in the third quarter, driven by strong consumer spending and heavy business investment in artificial intelligence. Economists say employers may have overhired after the pandemic, and some businesses may be uncertain about their staffing needs as they integrate AI into operations. They say uncertainty generated by the U.S. and Israel-Iran war, which has pushed up energy prices, is also making employers hesitant to add workers. Limited opportunities make job-hopping harder, which in turn suppresses wage growth. Job seekers face limited opportunities Young people, recent college graduates and some unemployed workers are also struggling to find work. Disappointment with the economy and anger over the nine-month Middle East conflict cost President Trump's Republican Party control of Congress, with Democrats performing strongly in this week's midterm elections. Gregory Daco, chief economist at EY-Parthenon, said: "For workers who already have jobs, job security remains high, while opportunities for job seekers and job switchers have become more limited. More broadly, the economy has shifted to a 'job-light expansion,' as investment tilts toward technology and businesses increasingly rely on existing workers to meet solid demand, which is reflected in firmer hours worked." Average hourly earnings are expected to rise 0.3% in October after edging up 0.1% in September. In the 12 months through October, wages are expected to have risen 2.9%. That would be the first time the year-on-year gain has fallen below 3% since May 2021, slowing from 3.0% in September. While that would highlight the disinflationary effect of the labor market, it would also show further erosion of household incomes, which are already under pressure from inflation. Household disposable income, adjusted for inflation and taxes, fell in September. Economists expect consumer spending and the overall economy to slow in the fourth quarter and into 2027. They still expect the Fed to raise rates in December, though some believe modest wage pressures could limit the number of rate hikes next year. The Fed last week kept its benchmark overnight rate in the 3.75%-4.00% range while acknowledging that inflation "remains somewhat elevated." The October consumer inflation report, due next Tuesday, may provide more clues on the direction of monetary policy in early 2027. Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, said: "The labor market is neither too hot nor too cold. So, as far as labor conditions go, the Fed has nothing to worry about."