Orlando's Outlook: Jobs rebound, but entire report is mixed

11-03-2017

Bottom line While the labor market rebounded in October from hurricanes Harvey and Irma to the strongest payroll levels in a year, this morning’s headline flash of only 261,000 nonfarm jobs added last month is disappointing on the surface. However, when we add back the positive revision of 90,000 jobs from August and September, today’s adjusted gain of 351,000 jobs is more in line with the bounce we were expecting. Moreover, manufacturing hiring leapt solidly back into the black in October with a gain of 24,000 jobs, and the unemployment rate (U-3) and labor impairment rate (U-6) fell to 4.1% and 7.9%, respectively, cycle lows that go back to 2000 and 2006.

Weighing against those obvious positives, however, are several negatives, which is why we are characterizing this morning’s labor-market report as a mixed bag. The household survey lost 484,000 jobs in October, after adding 906,000 jobs in September; wage growth was flat for last month and grew only 2.4% on a year-over-year (y/y) basis, down sharply from a 2.8% increase in September; the average private workweek for all employees remained unchanged for the fourth consecutive month at 34.4 hours; and the labor force participation rate plummeted to 62.7% in October from a 3-year high of 63.1% in September.

Nevertheless, there are enough positives in this morning’s report of a labor-market rebound to keep the Federal Reserve on track for another quarter-point rate hike at its mid-December policy-setting meeting and to keep stocks inexorably grinding higher to new records into year-end.

ADP foretold the story The ADP National Employment Report, a forward-looking proxy for private payroll growth, added a much stronger-than-expected 235,000 jobs in October, which was a 7-month high and more than double the downwardly revised gain of only 110,000 new jobs in September. Small firms with fewer than 50 employees added 79,000 jobs in October (34% of total, compared with September’s downwardly revised loss of 16,000 jobs); midsized companies with 50 to 499 employees added 66,000 jobs (28%, compared with September’s downwardly revised 58,000, or 53% of total); and larger companies with more than 500 employees hired 90,000 (38%, compared with September’s downwardly revised 68,000, or 62%). The strong reversal in small-company hiring—a key engine of growth in the domestic economy—was an important “tell” for this morning’s overall payroll bounce.

Jobless claims plunge Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Oct. 14 were only 223,000, which are at their lowest levels since 1973. The strength in claims was another key metric that pointed to a strong rebound in payrolls this morning.


Nonfarm payrolls bounced in October They added a weaker-than-expected 261,000 jobs, well below the Bloomberg consensus gain of 313,000 jobs and our own 315,000 estimated gain here at Federated. But the Bureau of Labor Statistics (BLS) revised August and September higher by a combined 90,000 jobs, so the adjusted gain in October was actually a stronger-than-expected 351,000 jobs. August’s preliminary gain of only 156,000 jobs, revised slightly higher last month to a gain of 169,000 jobs, was revised up again this morning to a final gain of 208,000. So August’s flash quirky payroll miss was subsequently revised up by 52,000 jobs. September’s preliminary gain of a surprisingly much weaker-than-expected loss of 33,000 jobs was revised up this morning to a modest gain of 18,000 jobs. Due to the hurricanes, 1.47 million people were unable to get to work in September—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. So the return to normal weather has allowed the labor market to get back on track.

Private payrolls better, too Private payrolls added a weaker-than-expected 252,000 jobs in October, below the Bloomberg consensus of a gain of 302,000. But here, too, the BLS revised August and September up by a combined 75,000 jobs, so the adjusted October payroll gain was a robust 327,000 jobs. August’s preliminary gain of 165,000 jobs, which was revised down slightly last month to a gain of 164,000, was revised back up this morning to a stronger final gain of 184,000 jobs. September’s preliminary loss of a much weaker-than-expected 40,000 jobs was revised up this morning to a modest gain of 15,000 jobs.

Government hiring rises for the fifth consecutive month As the difference between private and nonfarm payrolls, government hiring collectively added 9,000 federal, state and local jobs in October. That compares with gains of 3,000 in September, 24,000 jobs in August, 5,000 in July and 3,000 in June. In October, the feds added 5,000 jobs, and state and local governments added 2,000 jobs each.

Household jobs plummet The admittedly volatile household survey fell off a cliff in October, losing 484,000 jobs, after gaining 906,000 jobs in September. Households had shed 74,000 jobs in August, but added 345,000 jobs in July and 245,000 in June. The household survey is a leading indicator for nonfarm and private payrolls, so October’s sharp sequential decline is worrisome as we look out to November. It also serves as the basis for the unemployment rate.

Unemployment, labor-impairment and participation rates all decline The official unemployment rate ticked lower to 4.1% in October, its lowest level since a 3.9% rate in December 2000. The labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—plummeted again to 7.9% in October (its lowest level since December 2006) from 8.3% in September and 8.6% in June, July and August. This sharp contraction over the past few months suggests that the slack in the labor market is tightening. Finally, the labor-force participation rate (the share of working-age people in the labor force) dropped to 62.7% in October from a 3-year high of 63.1% in September. Its 38-year cycle low of 62.4% was in October 2014.

Wages and hours worked both flat Hourly wages were unchanged on a month-over-month (m/m) basis in October, compared with a strong 0.5% gain in September. On a y/y basis, wage growth inched up a tepid 2.4%, down from 2.8% in September. The average private workweek for all employees remained unchanged for the fourth 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 and manufacturing both positive Manufacturing surged to a gain of 24,000 jobs in October, up sharply from an upwardly revised gain of 6,000 in September (originally reported as a loss of 1,000 jobs). Manufacturing had gained 44,000 jobs in August (a 19-year high). We expect this uptrend to continue, as the ISM manufacturing index hit a new 13-year high at 60.8 in September. Construction hiring rose by 11,000 new jobs in October for the second consecutive month versus 24,000 in August. Construction should remain strong in coming months as the rebuilding from the hurricanes accelerates.

Retail remains weak They shed 8,000 jobs in October, compared with an upwardly revised gain of 7,000 in September (originally reported as a loss of 3,000), versus job losses of 2,000 in August, 11,000 in July, 4,000 in June, 10,000 in May, 4,000 in April, 40,000 in March and 29,000 in February. Will our expectations for a good holiday season reverse this negative trend?

Temps remain strong with gains for 10 consecutive months This category added 18,000 jobs in October, 8,000 in September, 9,000 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 year-end surge in employment.

Leisure rebounds from storms This economically sensitive category, with a heavy concentration in Florida, added 106,000 jobs in October, after losing 102,000 in September and 9,000 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. So the powerful rebound we expected to see in the fourth quarter is beginning to materialize.

Education & health recover These two bounced back in October, adding 41,000 new jobs—nearly double the 22,000 new workers added in September—compared with 46,000 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. The rebound we expected here is beginning to happen, as well.

JOLTS softer, with a lag 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 August decreased by 58,000 jobs (a 1% decline) to 6.08 million m/m. That’s just off July’s record high of 6.14 million. Hires at 5.43 million continue to lag behind, showing that employers are not hiring enough to keep up with their needs. The quits rate and the layoffs/discharges rate essentially unchanged at 2.1% and 1.2%, respectively. The hires rate rose slipped from 3.8% to 3.7%. Taken together, the data indicates companies still are having little success finding workers with the right skills to fill open positions.

Challenger plunges to a 2-decade low In another sign employers continue to hold onto workers, the October jobs-cuts report by Challenger, Gray & Christmas showed companies announced plans for only 29,831 layoffs last month, down 7.7% from September and 3% lower than a year ago. That takes the year-to-date amount to just 351,000 job cuts—the lowest 10-month total since 1997. Companies in the health-care and services sectors announced the most layoffs.

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