Is tight labor market limiting U.S. job growth?

The slowdown in payrolls growth in August and September might delay the first Fed rate hike until early 2016, unless the weakness is reversed in the two remaining job reports ahead of the 15-16 December FOMC meeting. However, the disappointing payroll growth of 136k in August and 142k in September does not signal the start of sustained labour market deterioration and a weak economy, in our view.

As a matter of fact, there are some indications that the recent slowdown in job growth might be partly due to limited labour supply rather than weak demand.

The deterioration of job growth in manufacturing - a sector highly sensitive to cyclical swings and the USD - accounts for only one-fourth of the slowdown in total payrolls growth in August and September compared to the trend earlier this year. 

The sharpest weakening in payrolls growth over the last two months has actually been in business services - a sector which normally is considered relatively insensitive to swings in global demand and the USD. The same goes for retail trade and education and health services, where the slowdown in employment growth also has been relatively significant.

These observations suggest that a tightening labour market and difficulties in finding qualified workers might be a factor now starting to limit job growth, adding to the negative impact of the stronger USD, says Nordea Bank.