Financial Review

September Jobs Report – The Calm After the Storms

Sinclair Noe — October 6, 2017

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DOW – 1 = 22,773
SPX – 2 = 2549
NAS + 4 = 6590 (record)
RUT – 1 = 1510
10 Y + .02 = 2.37%
OIL – 1.54 = 49.25
GOLD + 8.30 + 1277.10

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The economy “lost” 33,000 jobs in September, marking the first month of job losses since 2010, and breaking a string of 83 consecutive months of job gains. The unemployment rate fell to 4.2% from 4.4% and hit the lowest level since December 2000. The BLS said the hurricanes affected the payroll jobs number but not the unemployment rate.

Hiring and employment in September were stunted by hurricanes Harvey and Irma. The monthly jobs report is based in part on a survey of roughly 60,000 American households. One question on that survey asks whether people who normally have jobs were not at work because of bad weather.

In a typical September, around 30,000 workers fall into that category; this year, that number was 1.5 million. Another nearly 3 million people reported working part-time because of the weather. The Bureau of Labor Statistics acknowledged that the storms reduced total employment but didn’t estimate the size of the effect.

Still, it is nearly certain that, had it not been for the hurricanes, job growth would have been positive for a record 84th consecutive month. Hiring could even get a boost from a temporary increase in the number of people employed to help clean up and rebuild after the hurricanes. In 2005, Hurricane Katrina resulted in 2 months of weak employment growth, then a jump in hiring.

Wages rose 0.5%, or 12 cents, to $26.55 an hour, likely reflecting a hurricane-induced bump. Over the past 12 months hourly pay increased by 2.9%, up from 2.7% in the prior month and matching a post-recession high. Upward revisions to earnings in the two prior months show wage pressures had been building before the hurricanes hit.

The industry hurt the most was the restaurant business, where employment fell by a whopping 105,000. The absence in the latest employment report of so many restaurant workers, who tend to be lower paid employees, likely inflated wage growth in September. If they were included the growth in pay would have been smaller. Low-wage, hourly workers in other industries may also have been disproportionately affected by the storm.

And this also gives us a real time understanding of why wages have remained stubbornly low throughout the recovery. While almost any job is better than no job – many of the jobs created in the recovery are low-paying. Although the Census Bureau last month reported a jump in annual incomes across a wide spectrum, households with incomes below the median are still worse off than they were in 2000.

There are signs that the labor shortage is nudging up wages in some places. Target announced last month that it was increasing its base hourly pay by $1, to $11 — higher than or equal to the minimum wage in every state.

A quick rundown of other sectors: Healthcare added 23,000 jobs, transportation and warehousing increased by 22,000, financial activities added 10,000 and construction added 8,000 jobs. Manufacturing lost 1,000, information lost 9,000 jobs, and retail lost almost 3,000 jobs.

The U-6 unemployment rate moved down to 8.3%, this measure includes unemployed plus underutilized – meaning people working part-time for economic reasons. The number of people working part-time for economic reasons also fell. There are 1.73 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 1.74 million in August.

The Labor Force Participation Rate was increased in September at 63.1% but is still at historically low levels. This is the percentage of the working age population in the labor force. This would indicate that the labor market is strong enough to pull people into the labor pool. Labor-force flows data showed the number of Americans not in the labor force a month earlier and found a job in September hit a record high.

Much of the decline in labor force participation rates can be attributed to baby boomers who are retiring and younger workers who are staying in school to get more skills. But the Labor Force Participation Rate for workers age 25-54, the prime working years, also remains historically low – the best guess there is that the opioid epidemic has left many workers sidelined. Trump promised to get these guys back to work, but it isn’t happening.

Since he took office, prime-age male labor force participation has fallen by half a percentage point. A federal study estimated that prescription opioid abuse cost the economy $78 billion in 2013 – a number that has surely climbed over the past 4 years, but that does not capture the broader effect on businesses from factors like lost productivity. And we all know that lower productivity keeps a lid on wages.

Many companies report that more than 25% of job applicants fail to pass a drug screen test. The Fed’s regular Beige Book surveys now include regular notes on the inability of employers to find workers able to pass drug screenings. Were it not for the drug issue, workers trapped in low-wage jobs might be able to secure better-paying, skilled blue-collar positions and a toehold in the middle class.

In September, the year-over-year change was 1.77 million jobs. This is the lowest year-over-year job growth since August 2011. The loss of 33,000 jobs means the average monthly job growth so far in 2017 is just over 148,000 jobs.

At this point in 2016, the average monthly job growth was just under 200,000 jobs. At this point in 2015, the average monthly job growth was 209,000 jobs. So, it’s clear that job growth so far during the Trump Administration has slowed from past years.

The government raised its estimate of new jobs created in August to 169,000 from 156,000. July’s gain was reduced to 138,000 from 189,000 – a net loss of 38,000 jobs in the monthly revisions. The September loss will also be revised in the months ahead.

This month’s numbers were certainly affected by Hurricanes Harvey and Irma. There is a decent chance that next month’s numbers will show a big increase, and almost every economist today is saying this is a weather-related aberration – and that is probably true, but we did break the string of consecutive months of job gains.

In technical analysis of stock charts, analysts watch the price action – they pay little or no attention to the fundamental news. Is the price going up or down? It doesn’t matter if there was a bad earnings report or a new CEO was hired.

If the September job losses are not revised to positive next month, it means we have broken a very strong upward trend in jobs – the reason why the trend is broken might not be as important as the fact that the trend is broken.

Support has been violated, and once a trend line is broken it is much easier to see another test of support. This is how an uptrend reverses and turns into a downtrend. There is a good chance that today we saw a key reversal in the 83-month uptrend in the job market.

But for now, it is too early to declare the jobs recovery is over. We need to wait for confirmation. One month does not make a trend. With the unemployment rate at 4.2%, the economy is getting closer to full employment. It will be more and more difficult for employers to fill jobs. Federal Reserve policy makers have been watching for signs of an acceleration in pay that may push inflation closer to their goal.

At this point in the recovery, wage growth should be well over 3%. Even with a one-month bump, wages are still lagging. There are several reasons why wages are stagnant – globalization and automation are frequently cited. Also, demographics – the silver tsunami of retiring boomers – usually experienced, qualified workers who earn more than their junior counterparts.

Sub-4 percent unemployment is very possible and very soon, and no one at the Fed thinks that can be sustained without triggering higher inflation. The probability of a Fed rate hike in December rose to 98 percent following the report, from about 75 percent on Thursday, according to the prices of federal funds futures contracts, marking a new high.

We still have a couple more jobs reports before the Fed FOMC meeting in December which will almost certainly confirm this month is a “one-off”, weather related glitch – the soft payroll number will be ignored at the Fed; unemployment is what matters, and this report therefore makes a December rate hike even more likely.

So, the unemployment rate dropped to 4.2% but the economy lost 33,000 jobs in September. It was a terrible jobs report, but with the hurricanes, nobody expected anything good.