Discounting hurricane-related weakness, the September employment report was strong and should make the FOMC somewhat more comfortable with a December rate hike. Accordingly, we have somewhat more confidence in our call of a December rate hike, which we had previously seen as quite a close call. Having said that, we would caution that two more employment reports precede the December decision, not to mention very significant inflation data.
It is difficult to draw insights from the establishment survey data for September, which were distorted by Hurricanes Harvey and Irma.
▪ Nonfarm payrolls declined 33K in September. As the BLS commissioner stated, this reflected an unknown—but certainly substantial—degree the impact of the hurricanes: “It is likely that the payroll employment estimates for September were lower due to the effects of Hurricanes Irma and Harvey.”
▪ The negative impact on nonfarm payrolls from the hurricanes was not distributed proportionally across industries. As the BLS notes, certain industries, such as food services and drinking places, were affected more than others.
There was, nevertheless, significant news in this report.
▪ Average hourly earnings were strong. One should be skeptical of the 0.5% jump in September, but it’s significant that the data for the previous two months were revised up substantially. ▪ The unemployment rate (U-3) and underemployment rate (U-6) both declined, U-3 by two tenths and U 6 by three tenths.
▪ The participation rate rose two tenths. That by itself is a sign of an improving labor market, and it also makes the decline in the unemployment rate even more impressive.
Some, but not all, of the data in the employment report were distorted by the hurricanes. On the other hand, there were clear signals from other data that apparently were not distorted.
▪ Payroll employment in September was significantly distorted, though by an amount that is unclear. ▪ There was apparently no distortion to the household survey, as suggested by the BLS, and hence the unemployment rate and the participation rate.
▪ The impact on the establishment data from the hurricanes varied across industries. As the BLS notes, certain industries, such as food services and drinking places, were affected more than others. ▪ These industries are likely to provide lower-paying jobs. Thus, the large increase in September average hourly earnings (0.5%) likely overstates wage growth, as lower-wage individuals were more likely to be dropped. So we also down weight the information on average hourly earnings in September. ▪ But even setting aside the distorted September data, upward revisions to wages in the previous two months mean this report represents a heartening change in the wage picture for the FOMC: Whereas previously the 12-month change in average hourly earnings in August had been 2.5%, the August figure has been revised up to 2.7%. So the story about an upturn in average hourly earnings is clear.
On balance, we saw this as a report that would strengthen the Committee’s support for a December hike, and it raised the probability we assign to a December hike.
▪ Participants seem to be placing more emphasis on wage inflation as a precursor to firmer price inflation. The apparent upturn in average hourly earnings is a nice counterweight to the recent slowing in core inflation, which most expect to be temporary.
▪ Along with that, there is concern about the unemployment rate falling too fast and too far below the NAIRU, again reducing the willingness to be patient.
▪ The incoming inflation data also pose risks to a December hike. It is quite possible that inflation numbers will come in quite soft, making the FOMC uneasy with hiking in December.
▪ So while a December hike is not a done deal—with two more employment reports and a couple of important inflation reports—today’s report makes it more likely.
▪ For what it’s worth, after the employment report, two Fed presidents commented on their views of a December hike. Both recognized the building pressure on wages. Kaplan said he was open-minded about a December hike but “not there yet,” adding that the FOMC “ought to be patient.” Bostic was in wait-and-see mode despite citing “strong growth in wages.”
▪ Today’s report was not enough to move them from a wait-and-see posture, needing more data to be convinced. Of course, with much data ahead, everyone should be in a wait-and-see posture. But what they saw today was promising and strengthened the already-strong consensus for a December hike reflected in the median dots from the September meeting.