Ignoring the headline on the monthly jobs report is risky business, but it’s what I recommend you do this month. Sure, you will sound more credible dismissing it if you can cite the actual numbers, but economically speaking, the standardized format of the report ended up burying the lead.
- Nonfarm payrolls rose by a much weaker-than-expected 134k, but upward revisions to the prior two months left the 3-month average nearly unchanged at 190k (versus a previously reported 185k).
- The unemployment rate fell to just below 3.7% (a 48-year low of 3.68% unrounded) with only modest pockets of weakness elsewhere in the household survey.
- Wage growth retraced to 2.8%, but the underlying trend shows growing momentum, despite the monthly fits and starts.
- Weather effects: In addition to the notable upward revisions (87k), there were a number of signs that the headline number was moderately by Hurricane Florence. Leisure & hospitality losses (-17k) were largely confined to restaurants -- a fraction of their decline in September 2017, but a big reversal after months of gains, and likely extra-vulnerable in the Carolinas. Retail job losses (-20k) were widespread and likely reflected a combination of weather and sector-specific effects. Most notably, individuals not at work due to bad weather was around 299k – far below the level in September 2017 amid hurricanes Harvey and Irma, but significantly above the average over the prior 13 years.
- Upward revisions to come: As many have noted, upward revisions to the September payroll number are likely. Florence struck late in the survey week, disrupting businesses' ability to respond to the survey.
- No signs of trade tensions: Manufacturing was revised up for August and posted a sizable gain of 18k in September. The few job losses were concentrated in nondurables manufacturing, as opposed to weakness in durables (especially autos) in the preliminary August report. The employment diffusion index held at a healthy 60.9% overall and 62.5% for manufacturing.
- There were a few modest negatives in the household survey:
- Labor force participation unchanged at 62.7%
- Decline in job leavers (-132k)
- Increase in involuntary part-time work and "U6" under-employment to 7.5% from 7.4%
- Long-term unemployment rose (52k)
- However, the share of new entrants to the labor force who are immediately employed continued to climb. New entrants and reentrants going to unemployment was a meager 33k. This raises interesting questions: whenever we get a recession, how long will these reentrants and new entrants continue searching for jobs before leaving the labor force? Will positive first experience increase attachment or leave these latest new entrants more frustrated by tough times? Will reentrants get fed up or build resilience?
- This report will strengthen the argument for the Fed to head toward restrictive monetary policy, without pausing at neutral, assuming hourly earnings continue to creep up. We haven’t seen three straight months of wage gains at 0.3% or more since 2008. NY Fed President John Williams’s interview this morning also seemed to undermine the idea of pausing at neutral, as he continues to walk back from the “R-star” framework he has previously championed.
- The re-steepening of the yield curve makes sense in a world where the Fed is downplaying if not abandoning guidance on where “neutral” might lie. Certainly there are recession risks and they start rising in late 2019, but there’s not enough of a clear and present danger to justify inversion at this point. That uncertainty means that abandoning guidance on neutral interest rates is a two-for for the Powell Fed: Not only does it free policy makers' hands, but it gives them a new tool for monitoring the outlook. The market is now free to give the Fed more of a feedback signal, rather than follow policy makers’ lead.