Beneath the Headlines, a Clear Sign for December: the September Jobs Report
The September jobs report was something of a funhouse, where nothing was quite what it seemed at first glance. Turn on the lights, though, and what emerges is a more straightforward portrait, even if a few puzzles remain. As it turns out, the labor market has been tightening more than previously appreciated, which smooths the Fed’s path to a December rate hike. Hurricanes Harvey and Irma clearly depressed payroll growth, but their impact was relatively concentrated; the household survey was surprisingly strong, but there are reasons to take that with a grain of salt; the rise in hourly earnings was the real story that the Fed will focus on.
Here’s your cheat sheet:
While the storms clearly slowed down job growth in most industries, the actual job losses were concentrated to a remarkable degree, with clear signs of weather effects. The diffusion index dropped from 60.2, but only to 55.7, as the overwhelming majority of job losses came in leisure/hospitality (-111,000) – specifically restaurants and bars, which are extra-sensitive to weather disruptions. In the payroll report, workers don’t count if they didn’t receive any pay for the pay period that corresponds to the survey week, and many people in restaurants and bars are paid weekly. Moreover, in September, Hurricane Irma struck just at the beginning of the survey week, knocking out a lot of these jobs in Florida, where the leisure/hospitality industry looms extra-large. There were other clear signs of anticipated weather effects: within retail trade payrolls were down in food/beverage and up in building/gardening materials, and they were up in transportation/warehousing too.
If you assumed away the lost restaurant and bar jobs, you’d get nonfarm payrolls of about +75,000 – more or less hitting the consensus forecast. In other words, the storms seem to have had roughly the anticipated impact of slowing job growth overall, aside from knocking out one particularly sensitive category. And while the BLS indicated that the hurricanes had not affected the response rates to its surveys, there’s still a decent chance of of revisions. After hurricane Katrina, nonfarm payrolls were initially reported as -35,000 before being revised up to +67,000. Even without substantial revisions, job growth is likely to bounce back in October, given the forward momentum in the U.S. economy and the fact that the Fed’s policy rate remains lower than inflation.
The household survey is harder to explain. It had been expected to outstrip the payroll report, because it counts workers waylaid by the weather as employed, even if they did not work or get paid at all over the survey week. Even so, the upward leap in ranks of the employed (906,000) and the labor force (575,000) were dramatic to the point of being suspicious. On the other hand, while the drop in unemployment was large (-331,000), it roughly reversed the rise in unemployment witnessed over the prior three months (+271,000). Moreover, the Septemeber household figures look less crazy in light of the fact that over those prior three months, the unemployment rate and the underemployment had both stalled out, even as payroll growth averaged 172,000 – nearly twice as much as needed to keep unemployment steady. Certainly, some workers were being pulled into the labor force by the strong job market and not all of them were finding jobs right away, but stll there’s an air of payback here. As usual, the truth probably lies somewhere in the middle: the household surveys have been a little soft the last few months, and now they have overcorrected and seem likely to moderate over the next few months.
All of the above is reason to take the average hourly earnings figures seriously. Not the September numbers, of course. That 2.9% rise for the year-on-year figure was skewed upward by the losses in leisure/hospitality jobs, which are notoriously low-wage. The real story is the upward revisions to the July and August figure: to 2.6% and 2.7%, respectively, from what had seemed a run of four straight months stuck at 2.5%. The Fed will be quick to take notice of these revisions, especially since wages are considered less volatile than consumer prices.
Putting it all together, the story appears to be: the labor force had a full head of steam heading into the hurricanes, with wage pressures rising, and employment, unemployment, and underemployment all improving. While the storms clearly slowed down overall job growth, the actual job losses were tightly concentrated to a remarkable degree. The Federal Reserve is sure to read this as confirmation of its existing views – both on how the storm-related disruptions are likely to prove transitory and, crucially, on the likelihood of traditional inflationary pressures re-emerging. The Fed has made a case such that it needs only a slim excuse to hike. Absent material backsliding in inflation or job growth, they just got it.
As iCIMS’ former chief economist, Josh Wright led a team of data scientists in analyzing emerging trends in the U.S. labor market. With publications ranging from academic journals to national media, Wright previously served as a U.S. economist with Bloomberg L.P., and was a staff researcher at the Federal Reserve.