US: Employment Situation

October 5, 2018 07:30 CDT

Consensus Consensus Range Actual Previous Revised
Nonfarm Payrolls - M/M change 180,000 150,000 to 195,000 134,000 201,000 270,000
Unemployment Rate - Level 3.8% 3.8% to 3.9% 3.7% 3.9%
Private Payrolls - M/M change 175,000 145,000 to 190,000 121,000 204,000 254,000
Manufacturing Payrolls - M/M change 10,000 6,000 to 15,000 18,000 -3,000 5,000
Participation Rate - level 62.7% 62.6% to 62.8% 62.7% 62.7%
Average Hourly Earnings - M/M change 0.3% 0.2% to 0.4% 0.3% 0.4% 0.3%
Average Hourly Earnings - Y/Y change 2.9% 2.8% to 3.0% 2.8% 2.9%
Av Workweek - All Employees 34.5hrs 34.4hrs to 34.5hrs 34.5hrs 34.5hrs

In a mixed report that keeps expectations for Federal Reserve policy in line, September payroll growth wasn't as strong as expected but the unemployment rate went down and August gets a big upgrade.

Nonfarm payrolls rose a lower-than-expected but still respectable 134,000 with August revised 69,000 higher to 270,000. The unemployment rate fell 2 tenths to 3.7 percent which, in contrast to payroll growth, is stronger than expected and a 49-year low. This reflects another drop in the number of people actively looking for jobs, now at 5.964 million and well down from 6.235 million in August. Not raising any fuss are wage indications from average hourly earnings which rose an as-expected 0.3 percent for a year-on-year 2.8 percent that is 1 tenth below expectations.

Looking at payroll data, manufacturing added a stronger-than-expected 18,000 in September with August revised into the plus column to 5,000 vs an initial minus 3,000. Construction added a very solid 23,000 and mining, which is perhaps the strongest of any industry, up 5,000 which is very strong for the sector's size. Retail, however, shed 20,000 payroll jobs with trade & transportation, where conditions are tight due to the strength of demand, up 8,000 following a 55,000 surge in August. Professional & business services rose a very strong 54,000 with the subcomponent of temporary help up a solid 11,000, both indicating that employers are scrambling to fill positions.

The key in all of this is wages and they're showing steady -- but not accelerating -- pressure. Average hourly earnings rose an as-expected 0.3 percent in the month for a year-on-year 2.8 percent. The monthly revision to August, down 1 tenth to 0.3 percent, is also favorable, favorable that is if you're the Federal Reserve worried about wage inflation.

The impact of Hurricane Florence, which struck the Carolinas at the end of the report's mid-month sample week, is uncertain and is probably marginally unfavorable. But this is unimportant. What is important is that the labor market is adding jobs at a solid rate, that the number of people looking for jobs keeps going down and that wage pressures are steady and firm, all confirming expectations for a steady path of gradual rate hikes by the Fed.

Market Consensus Before Announcement
A solid 180,000 rise in nonfarm payrolls is Econoday's consensus for the September employment report with the unemployment rate seen edging down to 3.8 percent. Average hourly earnings, after a strong showing in August, are expected to rise a noticeable 0.3 percent with the year-on-year rate, however, expected to edge 1 tenth lower to 2.8 percent. Private payrolls are seen rising 175,000 with manufacturing payrolls expected to bounce back from a rare decline in August with a solid increase of 10,000. The workweek is seen unchanged at 34.5 hours with the labor participation rate also unchanged at 62.7 percent.

The most closely watched of all economic indicators, the employment situation is a set of monthly labor market indicators based on two separate reports: the establishment survey which tracks 650,000 worksites and offers the nonfarm payroll and average hourly earnings headlines and the household survey which interviews 60,000 households and generates the unemployment rate.

Nonfarm payrolls track the number of part-time and full-time employees in both business and government. Average hourly earnings track employee pay while the average workweek, also part of the establishment survey, tracks the number of hours worked. The report's private payroll measure excludes government workers.

The unemployment rate measures the number of unemployed as a percentage of the labor force. In order to be counted as unemployed, one must be actively looking for work. Other commonly known data from the household survey include the labor supply and discouraged workers.

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.