Orlando's Outlook: Florence distorts solid jobs report

10-05-2018

Bottom line This morning’s nonfarm payrolls report for September rose by a much weaker-than-expected gain of only 134,000 jobs, well below consensus expectation for a healthier gain of 185,000 jobs. But the Labor Department revised July and August payrolls up by 87,000 jobs, which more than offset today’s disappointing miss, pushing adjusted payrolls up toward our own more aggressive forecast here at Federated for a gain of 219,000 jobs. Moreover, the household survey rebounded with a vengeance in September, surging by 420,000 jobs, which reversed a surprising decline of 423,000 jobs in August.

So what caused September’s jobs miss? Hurricane Florence hit North and South Carolina on Sept. 13, smack in the middle of the Labor Department’s survey week. It killed 48 people and caused an estimated $38 billion in damages, making it the Atlantic’s sixth-costliest hurricane. Labor reported that 299,000 people weren’t at work due to the bad weather in September 2018, compared with an historical 42-year average for all Septembers of 85,000 people missing work. Only 23,000 were not at work in August 2018. In sharp contrast, in September 2017, Hurricanes Harvey and Irma caused 1.47 million people to miss work, the highest total since 1996.

Bright spots this morning include the unemployment rate (U-3), which surprisingly fell to a new 49-year cycle low of only 3.7% in September. Also, the manufacturing sector recovered sharply last month by adding 18,000 jobs, after a preliminary loss of 3,000 jobs in August. Finally, average hourly earnings rose 0.3% in September for the third consecutive month and the fourth time in the past five months, posting a 2.8% year-over-year (y/y) gain, just off their fastest pace in nearly a decade (2.9%).

In response to this and several other strong data points recently, benchmark 10-year Treasury yields soared from 3.05% to an oversold 3.24% just this week, which likely keeps the Federal Reserve in play to hike interest rates again by a quarter point at their next policy-setting meeting in mid-December.

Nonfarm payrolls disappoint With a gain of only 134,000 jobs in September, payrolls came in well below the Bloomberg consensus of 185,000 jobs and Federated’s estimate of 219,000. But the Bureau of Labor Statistics (BLS) revised July and August sharply higher by a combined 87,000 jobs. July was revised from a preliminary gain of 157,000 jobs, to an even weaker 147,000 jobs last month, to a stronger final gain of 165,000 this morning. August was revised from a preliminary increase of 201,000 jobs last month to a revised gain of 270,000 this morning. We expect Florence’s September distortions to be revised away over time.

Government hiring rose Government jobs had a net gain of 13,000 (which means that private payrolls grew by 121,000 in September), led by a strong rise of 22,000 state jobs. Local governments shed 8,000, and federal payrolls slipped by 1,000.

Household survey bounces The admittedly volatile household survey added 420,000 jobs in September, which reversed the loss of 423,000 jobs in August, compared with a powerful gain of 389,000 jobs in July. This leading indicator for nonfarm and private payrolls serves as the basis for the unemployment rate.

Unemployment rate falls, labor-impairment rises and participation rate flat The civilian labor force rose by 150,000 workers in September, reversing a sharp decline of 469,000 people in August, compared with gains of 105,000 in July and 601,000 in June. That kept the labor-force participation rate (the share of working-age people in the labor force) unchanged at 62.7% in September, down from 62.9% in both June and July. The four-year high is at 63% in February, and the 41-year low of 62.3% was set in September 2015.

Because of the sharp increase of 420,000 workers in the September household survey, (compared with the decline of 423,000 people in August and an increase of 389,000 in July), the number of unemployed declined by 270,000 people in September (versus declines of 46,000 in August and 284,000 in July). That moved the unemployment rate down to 3.7% in September from 3.9% in both July and August, marking a new 49-year low.

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—ticked up to 7.5% in September versus 7.4% in August, which was a new 17-year low.

Wages rise, but hours worked flat Average hourly earnings rose 0.3% on a month-over-month basis in September for the third consecutive month and the fourth time in the past five months. That translates into a y/y gain of 2.8% in September, a tick lower that August’s 2.9% increase, its strongest gain since April 2009. For the third consecutive month and the seventh time in the past eight months, the average private work week for all employees was flat at 34.5 hours worked in September. This metric is important, as a change of 0.1 hour worked theoretically adds or subtracts 350,000 jobs to the economy.

Manufacturing rebounds, construction steady The manufacturing sector bounced in September, adding a stronger-than-expected 18,000 jobs, while August was revised up from a preliminary loss of 3,000 jobs to a gain of 5,000. July was revised up to a gain of 22,000 jobs, as the noise from summer furloughs is abating. Despite the ongoing summer weakness in housing, construction added 23,000 jobs in September, 26,000 in August, and 19,000 in July.

Temps steady, retail weak and transportation strong Temporary help (a leading economic indicator) added 11,000 jobs in September, versus 12,000 in August and 10,000 in July. Retail was weak in September, likely due to Florence, losing 20,000 jobs in September, after an upwardly revised gain of 12,000 jobs in August (revised from a loss of 6,000) and a modest gain of 4,000 jobs in July. We enjoyed the best “Back-to-School” retail season this summer in seven years, so we expect strong hiring ahead of the Christmas holidays. The transportation sector is already gearing up, with 24,000 new jobs in September and 21,000 jobs in August, after a modest 8,000 in July.

Strong Claims, ADP and JOLTS point to a solid labor market Initial weekly unemployment claims for the survey week that ended September 15 fell to 202,000, which is a new 49-year cycle low. ADP posted a much stronger-than-expected gain of 230,000 workers in September, which is a 7-month high versus only 168,000 in August, which was an 11-month low. The Job Openings and Labor Turnover Survey (JOLTS) posted a record 6.939 million openings in July (the last available data point), so there are more available jobs than unemployed workers to fill them. Also, a record 3.58 million Americans quit their jobs in July, as the quits rate rose to a 17-year high of 2.4%.

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