US: Employment Situation

Fri Oct 06 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Nonfarm Payrolls - M/M change 100,000 0 to 140,000 -33,000 156,000 169,000
Unemployment Rate - Level 4.4% 4.3% to 4.5% 4.2% 4.4%
Private Payrolls - M/M change 117,000 20,000 to 150,000 -40,000 165,000 164,000
Manufacturing Payrolls - M/M change 11,000 -20,000 to 15,000 -1,000 36,000 41,000
Participation Rate - level 62.8% 62.7% to 62.9% 63.1% 62.9%
Average Hourly Earnings - M/M change 0.3% 0.2% to 0.4% 0.5% 0.1% 0.2%
Average Hourly Earnings - Y/Y change 2.6% 2.5% to 2.6% 2.9% 2.5% 2.7%
Av Workweek - All Employees 34.4hrs 34.3hrs to 34.5hrs 34.4hrs 34.4hrs

The Department of Labor can't quantify September's hurricane effects on payrolls or the unemployment rate but they appear to be very dramatic nonetheless. Nonfarm payrolls were negative in September and, at minus 33,000, were well below Econoday's low estimate. But the big surprise in today's report are sudden indications of excessive labor market tightness as the unemployment rate fell 2 tenths to 4.2 percent and average hourly earnings spiked 0.5 percent with the year-on-year rate jumping 4 tenths to 2.9 percent. This report on the surface -- and needing confirmation from the October employment report to follow next month -- appears to change the dynamics for the labor market and suggests that the Federal Reserve, the decline in September payrolls aside, has fallen behind the inflation curve.

The 0.5 percent spike in earnings now matches July, which has been revised 2 tenths higher, as the strongest monthly surge of the expansion. The 2.9 percent yearly rate matches December last year as the expansion high. Revisions here are important and very sharp with August's yearly rate revised 2 tenths higher to 2.7 percent.

The 4.2 percent unemployment rate, derived from a separate set of data that also include the self-employed who are not on payrolls, is not only lowest of the expansion but of the prior expansion as well, going all the way back to January 2001. Here employment, likely reflecting a jump in those now actively looking for work, rose 906,000 at the same time that the number of unemployed fell 331,000. The pool of available workers which includes those who can work but aren't pounding the pavement fell a very sizable 547,000 to 12.429 million. This reading is a sleeper in this report and points squarely at the risk of a wage flash point. The labor participation rate, reflecting the move toward employment, rose 0.2 percent to 63.1 percent to exceed Econoday's high estimate by 2 tenths.

Turning now to payrolls, they were pulled lower by a 104,700 drop at restaurants. Again, the Labor Department says it can't pin this on hurricanes but it does seem likely. Both August and July nonfarm payrolls were revised lower by a net 38,000. Manufacturing payrolls fell 1,000 in September following an upward revised 41,000 surge in August but also following a sharply downward revised 11,000 decline in July. But averaged together and including a 21,000 rise in June, manufacturing is definitely improving and is a further risk to wage inflation.

Other data include, in what perhaps is a surprise given the hurricane disruptions in the South, no change in the workweek, at 34.4 hours in a measure that tracks all private sector employees. Government payrolls are a positive in the report, up 7,000 and making for a 40,000 decline in private payrolls in what, in an aside, is yet another miss for ADP which called here for respectable growth.

The hurricanes are one factor that may or may not have skewed payrolls sharply lower, and probably did, but it's the wage pressures that will make everyone on the FOMC, even the most dovish, suddenly concerned that wage-push inflation has arisen from the dead. The Department of Labor hasn't offered adequate explanations of these results which puts the focus on individual Fedspeak with the chances of a rate hike at the month-end meeting, let alone the December meeting, now likely in play.

Market Consensus Before Announcement
September will be the first employment report to register effects from Hurricane Harvey which hit too late in August to affect the data, and also the first to pick up the effects of Hurricane Irma. Going into September's report, nonfarm payroll growth slowed sharply to 156,000 after plus 200,000 showings in both July and June. Econoday's September consensus for nonfarm payrolls is 100,000 though the consensus range is extremely wide, between zero to 140,000. The unemployment rate is seen unchanged at 4.4 percent. Average hourly earnings were very weak in August, at only a 0.1 percent gain, but improvement is seen for September at a consensus 0.3 percent. Year-on-year hourly earnings are expected to come in at 2.6 percent vs August's 2.5 percent. Other calls are for a 117,000 rise in private payrolls vs August's 165,000 in what would reflect a rise in government hiring, an 11,000 gain for manufacturing payrolls following August's big 36,000 surge, a 1 tenth downtick in the labor force participation rate to 62.8 percent, and 34.4 hours for the workweek which would be unchanged.

The employment situation is a set of labor market indicators based on two separate surveys in this one report. The unemployment rate equals the number of unemployed persons divided by the total number of persons in the labor force, which comes from a survey of 60,000 households (this is called the household survey). Workers are only counted once, no matter how many jobs they have, or whether they are only working part-time. In order to be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The Establishment Survey-a survey of over 557,000 worksites- provides additional indicators. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job. Workers on strike during the relevant week are not included in the figures.

Due to sizeable swings in payroll employment during 2010 for hiring and then layoffs of temporary workers for the decentennial Census, analysts started giving essentially equal attention to private nonfarm payrolls as to overall payrolls. This added focus continued even after temporary Census worker issues were no longer a problem as the long-duration recession caused state & local governments to cut their workforce even as the private sector began to rehire during recovery.

The average workweek is a leading indicator of employment. Businesses tend to adjust total hours worked by increasing or decreasing the workweek before hiring someone new or laying someone off. These figures come from the Establishment Survey.

Average hourly earnings are monthly payroll figures reported before deductions for taxes, social insurance and fringe benefits. They include pay for overtime, holidays, vacation and sick leave. These figures come from the Establishment Survey.

If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions can be dramatic, and the information for investors is invaluable. By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline - boosting up bond and stock prices in the process.

The employment situation is the primary monthly indicator of aggregate economic activity because it encompasses all major sectors of the economy. It is comprehensive and available early in the month. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. In short, it provides clues about other economic indicators reported for the month and plays a big role in influencing financial market psychology during the month. Additionally, the Fed has made 6.5 percent unemployment a threshold for considering changes in policy - both for quantitative easing and the fed funds rate. And the Fed has emphasized that it is overall labor market conditions that matter - not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates. The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services in the economy. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. It is worth noting that these figures aren't adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.