On the surface the September jobs report was disappointing. Experts were expecting 90,000 new jobs, but the economy actually shed 33,000 jobs:
Employment dropped by 33,000 jobs in September the Labor Department said on Friday, against economists’ estimates in a Thomson Reuters poll for non-farm payrolls to grow by 90,000. That compared with 169,000 jobs created the previous month, After revisions job gains have averaged 91,000 over the past three months.
The report noted a sharp decline in food services and drinking hubs last month, with employment falling by 105,000 as many workers were off payrolls due to the storms. However, healthcare jobs rose by 23,000 in line with the average monthly gain over the past 12 months.
September saw the nation ravaged by hurricanes. Both caused damages exceeding $100 billion; according to Goldman Sachs (GS) the hurricanes impacted 10% of the population. However, economists’ estimates of 90,000 new jobs included the impact of the hurricanes … so much for forecasts. A bright spot is that the jobless fell to 4.2%, the lowest since 2001. The fact that the hurricanes did not impact the unemployment rate implies the economy is strong, at least for those working age individuals actively looking for work. The report could also embolden President Trump to keep talking up tax cuts an infrastructure spending.
While transportation and warehousing (+ 22,000 jobs) and healthcare were bright spots, manufacturing dipped slightly, losing 1,000 jobs. In my opinion, manufacturing is another barometer. The sector has some of the higher-paying jobs, and President Trump vowed to make efforts to improve manufacturing. I manufacturing is strong then wage growth could follow.
Hourly Wages Spiked
The average workweek remained unchanged at 34.4 hours. However, average hourly wages spiked to 2.9%, versus 2.5% in August. The metric was also likely impacted by the hurricanes. The drop in low-paying jobs in food services and drinking places likely skewed average hourly wages to make the metric appear more positive. Next month as hurricane-ravaged cities repair themselves, these lower-wage paying jobs should increase and likely cause the average hourly wage figure to trend down.
The number of jobs added to the economy should also improve as homes destroyed by the storms are rebuilt and people buy cars to replace those destroyed. The October jobs report could also be skewed. If an unemployment rate of 5.0% means we are at full employment then the 4.2% figure means the economy is relatively healthy.
What Will The Fed Do?
The Fed has stated that it will remain data dependent in deciding when to hike rates. Its main gauge on inflation has been personal consumption expenditures (“PCE”). It grew only 1.6% last year and has not approached the Fed’s target of 2% since the Financial Crisis. The Fed appears resigned to the fact that we might not see 2% PCE growth anytime soon. Average wage growth has gotten a lot of attention this year as another key metric. The Fed’s inability to spark wage growth for all Americans suggests that while its stimulus has driven up asset prices for the investor class, the working class might not have benefited proportionately.
Janet Yellen recently admitted she and her colleagues misjudged the fundamental forces driving inflation:
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said, according to prepared remarks.
The Fed lowered its expectations of inflation, yet still believes a gradual increase in rate hikes could be warranted. My interpretation is that the Fed might not remain data dependent when raising rates in the near-term. From an investor standpoint, I believe the Fed’s unwinding of its $4 trillion balance sheet could have the biggest impact on financial markets over the next year.