September Payrolls: Raincheck on the Recession

The September employment report tamped down fears that a U.S. recession could already be in the offing. While slower job growth definitely merits close monitoring, the headline pace is still enough to absorb new workers, and the industry breakdown was encouraging. Given elevated concerns about the economic outlook, these signs of resilience were reassuring.

Headline Numbers

• 136k rise in nonfarm payrolls, but after 45k in upward revisions to prior months, the 3-month average stood virtually unchanged at 157k.
• 3.5% unemployment: A surprising decline, bolstered by some positive secondary measures.
  
• 2.9% wage growth was a big disappointment, but easier to look past.

Key Details

• Recession risk gets pushed back: The unemployment rate almost always rises ahead of a recession, so a fresh decline pushes out the timeline for any potential recession into late 2020 at the earliest. That’s barring any major negative shocks, of course, but this report raises the bar for any given shock to be recession-worthy.
• Lower unemployment outweighs the surprising drop-off in wage growth: Slower job growth is consistent with cooling in the labor market and soft wage growth, but it’s also consistent with traditional late-in-cycle dynamics. Given the smaller sample and greater volatility in the household survey, the large drop in unemployment should be taken with a grain of salt, but the idea that we are months from a back-up in unemployment is quite reassuring. Meanwhile, inflation has been mysteriously weak for years, so it’s easier to discount that data point. Compositional effects may be at play here, and it will take a little more time to tease that out.
• Manufacturing and energy spillover still very much contained: The 15.7k rise in transportation/warehousing payrolls was the largest in months. The 114k rise in total private payrolls was still modestly above the breakeven rate, even before factoring in government payrolls. Aside from ongoing losses in the retail sector, the breadth of job gains was decent (diffusion index 53.7 vs. 53.5k), and the rise in temporary workers (10.2k versus 14.5k prior) was a good sign for the months to come. Business services (34k vs. 43k) and education/health care (40k vs. 56k) remain the stalwarts of this expansion. Payrolls in manufacturing (-2k vs. 2k), construction (7k vs. 4k), and mining/logging (0 vs. -5k) were not as bad as one might have feared.
• Census hiring having limited impact: The 22k gain in government payrolls came from state and local authorities, not the federal government.
• Income gains slowing but still comfortably in the 2016-2017 range: While that’s well below the pace of 2018 and early 2019, fading fiscal stimulus was expected to produce an effect like this. The question is whether it’s enough to withstand the current headwinds.
  
• Secondary household measures mixed: The household survey has swung from looking more pessimistic than the payroll survey in the first half of the year to now looking more optimistic. Still, it’s encouraging the labor force participation rate held steady at 63.2%, the employment-population ratio rose (to 61.0% from 60.9%), and the “U6” under-employment rate hit a new cycle low (6.9% vs. 7.2%). More crucially, the prime-age employment-to-population ratio rose to a new cycle high of 80.1% — which augurs well for wage growth going forward.
• Income inequality news was mixed: Wages rising faster for non-managerial positions and unemployment falling fastest for those without a high school diploma, but unemployment falling for the short-term unemployed but rising for the long-term unemployed.
• Hours worked were an overlooked relief. This was a big concern after their August dip, especially since this has a big impact on the all-important consumer income figure and the strong correlation between this metric and recession risk.

Takeaways

• Employers and job seekers: Don’t get rattled by scary headlines. This economy is not just still on its feet, but still moving forward. Even if it is slowing and uncertainties have grown, most economists still think we are significantly more likely to pull through than not.
• Markets will be focused on consumer spending and comments from Fed policy makers. With manufacturing weak and the labor market only modestly in positive territory, much depends on consumer spending and the Fed’s reaction function. Policymakers will be heavily influenced by the risk of tightening financial conditions and/or shocks to business and consumer confidence.
• Confidence remains the key risk: It’s worth recalling that some of the weakest economic reports have been survey or “soft” data, while the hard data of actual transactions and production have been more mixed. Given all the negative economic and political news, there seems to be a strong media effect at play. How much of a shock to confidence that delivers remains to be seen, but the Fed will do its best to provide a shock absorber.