Orlando's Outlook: This too shall pass

10-06-2017

Bottom line The devastation from hurricanes Harvey and Irma wrought additional havoc on this morning’s labor report for September, which saw a much weaker-than-expected loss of 33,000 jobs in the government’s establishment survey. That marked the first outright decline in job creation since 2010. According to the Bureau of Labor Statistics (BLS), approximately 1.47 million people were unable to get to work last month due to the bad weather—the most in any month since January 1996—compared with a typical September, in which only 80,000 employees can’t get to work because of weather issues.

While the headline job losses were shocking, to be sure, there were noticeable pockets of strength beneath the surface. The household survey rebounded to a gain of 906,000 jobs in September from August’s loss of 74,000 jobs, while the unemployment rate (U-3), which is based upon the household survey, fell to a 16-year low of 4.2%. In addition, the labor impairment rate (U-6) dropped to a 10-year low of 8.3%, the labor force participation rate rose to a 3-year high of 63.1% and wages grew 2.9% on a year-over-year (y/y) basis, their best showing in eight years.

In our view, this weather-impaired September weakness, in conjunction with August’s seasonal payroll quirk and July’s sharp downward revision this morning, is inconsistent with strength in other parts of the economy, such as the surging ISM manufacturing and service metrics, the smallest trade deficit in a year and solid durable and capital goods orders and shipments. Consequently, we expect the labor market to bounce back during the fourth quarter, and we believe the Federal Reserve remains on track for another quarter-point rate hike at its December policy-setting meeting.

In the meantime, the recent bond sell-off continues, as benchmark 10-year Treasury yields have risen from 2.01% in early September to 2.40% today, perhaps spooked by slower payroll growth, rising wage inflation and the prospect of additional Fed tightening. Equity investors may have belatedly decided to join their fixed-income brethren. After rallying 5.5% from an oversold reading at 2,417 in late August to an overbought new record high at 2,552 yesterday, we would not discount the potential for a modest, cleansing 2-4% near-term correction.

Epic September miss Nonfarm payrolls lost a surprisingly much weaker-than-expected 33,000 jobs, significantly below the Bloomberg consensus of a gain of 80,000 jobs and our own slightly more optimistic 85,000 estimated gain here at Federated. The BLS also revised July and August lower by a combined 38,000 jobs. July’s preliminary gain of 209,000 jobs, which was revised down to a gain of 189,000 last month, was revised down sharply again this morning to a final gain of 138,000. August’s preliminary gain of only 156,000 jobs was revised slightly higher this morning to a gain of 169,000 jobs. So this third-quarter average gain of only 91,000 jobs compares quite unfavorably to June’s final gain of 210,000.

Private payrolls miss, too They lost a much weaker-than-expected 40,000 jobs in September, below the Bloomberg consensus of a gain of 74,000. The BLS revised July and August down by a combined 70,000 jobs. July’s preliminary gain of 205,000 jobs, which was revised down slightly last month to a gain of 202,000, was revised down sharply again this morning to a final gain of 133,000 jobs. August’s preliminary gain of 165,000 jobs was revised down slightly this morning to a gain of 164,000. So the third-quarter average of adding only 86,000 jobs is well below June’s final gain of 207,000.

Government hiring rises for the third consecutive month The difference between private and nonfarm payrolls collectively added 7,000 federal, state and local government jobs in September. That compares with an upwardly revised gain of 5,000 jobs in August (originally reported as a loss of 9,000 jobs), another gain of 5,000 jobs in July (reported as a revised loss of 13,000) and a final gain of only 3,000 jobs in June. In September, the feds were unchanged, the states added 2,000 jobs and local governments added 5,000 jobs.

Household jobs soar The admittedly volatile household survey rebounded strongly with a gain of 906,000 jobs in September compared with a loss of 74,000 jobs in August—a sharp contrast to the powerful gains of 345,000 jobs in July and 245,000 in June. The household survey is a leading indicator for nonfarm and private payrolls, so September’s powerful rebound from August’s decline bodes well for further fourth-quarter job gains. It also serves as the basis for the unemployment rate.

Unemployment, labor-impairment and participation rates all improve The unemployment rate declined to 4.2% in September from 4.4% in August, its lowest level since a 3.9% rate in December 2000. The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—plummeted to 8.3% in September from 8.6% in June, July and August, its lowest level since May 2007. Finally, the labor-force participation rate (the share of working-age people in the labor force) rose to a 3-year high of 63.1% in September from 62.9% in August. Importantly, that’s up from its 38-year cycle low of 62.4% in October 2014.

Wage growth rises, but hours worked flat Hourly wages rose strongly by 0.5% on a month-over-month (m/m) basis in September, compared with a 0.2% gain in August. On a y/y basis, wage growth surged by a much stronger-than-expected 2.9%, which is an 8-year high, compared with an upwardly revised gain of 2.7% in August. The average private workweek for all employees remained unchanged for the third consecutive month at 34.4 hours, down from 34.5 in June. But that’s still marginally better than the 3-year low of 34.3 hours in both March and February. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 or more jobs to or from the economy.

Construction positive, but manufacturing turns negative Manufacturing actually lost 1,000 jobs in September, down sharply from an upwardly revised gain of 41,000 jobs in August (a new 19-year high, originally reported as a gain of 36,000), versus a downwardly revised loss of 11,000 jobs in July (originally reported as a gain of 26,000). We expect this uptrend to reassert itself soon, with the ISM manufacturing index hitting a new 13-year high in September. Construction hiring rose by 8,000 new jobs in September, down from a downwardly revised gain of 19,000 jobs in August (originally reported as a gain of 28,000), versus a loss of 9,000 jobs in July. This category should recover in coming months, as the rebuild from the hurricanes begins in earnest.

Retail losses continue for the eighth consecutive month Retail lost 3,000 new jobs in September, 7,000 in August, 11,000 jobs in July, 4,000 in June, 10,000 in May, 4,000 in April, 40,000 in March and 29,000 jobs in February. Will expectations for a good Christmas stem this negative tide?

Temps remain strong with gains for nine consecutive months Temps continued their streak of gains with 6,000 in September, 8,000 in August, 13,000 in July, 11,000 in June, 15,000 in May, 2,000 in April, 13,000 in March, 10,000 in February and 15,000 in January. Temps are an important leading indicator of employment growth, so this consistency is encouraging for a fourth-quarter employment rebound.

Leisure slumps due to Irma Many leisure workers are employed in Florida, so this economically sensitive category lost a whopping 111,000 jobs in September after breaking even in August. By comparison, this sector added 50,000 jobs in July, 38,000 in June, 33,000 in May and 60,000 in April. We expect this area to rebound strongly.

Education & health dinged These combined categories added only 27,000 new workers in September, compared with 45,000 in August, 51,000 in July, 40,000 in June, 37,000 in May, 45,000 in April, 16,000 in March and a strong 66,000 in February. We expect a rebound here, as well.

ADP shows small firm layoffs The ADP National Employment Report, a forward-looking proxy for private payroll growth, reported that the economy added only 135,000 jobs in September, down sharply from the gain of 228,000 new jobs in August. Small firms with fewer than 50 employees shed 7,000 jobs in September (compared with August’s downwardly revised gain of 43,000 jobs, or 19% of its total gains); midsized companies with 50 to 500 employees added 63,000 jobs (47% of the total, compared with August’s downwardly revised 66,000, or 29%); and larger companies with more than 500 employees hired 79,000 (59%, compared with August’s upwardly revised 119,000, or 52%).

Jobless claims rise due to storms Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Sept. 16 was 260,000, down sharply from the post-hurricane spike to 298,000 claims on Sept. 2. But this figure was much higher than August’s survey week reading of 232,000 claims, which is a 40-year low. These figures are distorted due to the destructive hurricanes, but they will smooth out over time.

JOLTS hits another record high The Job Openings and Labor Turnover Survey (JOLTS) measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends. In the most recent data available, job openings in July rose to a record 6.17 million, hitting another all-time high for the data series begun in 2000. The survey reported that hires remained at approximately 5.5 million in July, the quits rate increased slightly from 2.1% to 2.2%, the layoffs/discharges rate remained at 1.2% and the hires rate rose from 3.7% to 3.8% This collectively indicates that companies are having little success finding workers with the right skills.

Challenger gives different story The jobs-cuts from Challenger, Gray & Christmas for September fell 4.4% m/m to 32,346, which represented a 27% y/y decline. The low number of announced layoffs last month suggests that the hurricanes did not overly effect this area of the labor market.

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