Monday, 24 of September of 2018

Economics. Explained.  

Hurricanes Blew Out Jobs in September- Or Did They?

October 6, 2017

The employment report for September had, in our opinion, four significant takeaways.

  1. The official report for hiring said that the economy lost 33 thousand jobs in September as the combined impact from Hurricanes Harvey and Irma took their toll.
  2. But the household survey, from which the unemployment rate is derived, said that jobs rose by 906 thousand in September. So which is it?  Up by a lot?  Or a decline?
  3. Average hourly earnings have finally begun to climb. The yearly increase is now 2.9% which is the largest 12-month increase since June 2009.
  4. The increase in wages portends a pickup in the inflation rate. The Fed has been wondering why inflation has not begun to climb.  It will not accelerate the pace of rate hikes that it has previously described, but the wage and forthcoming inflation data will keep the funds rate on a steadily upwards growth trajectory.

The Bureau of Labor Statistics reported that hiring declined 33 thousand in September and it noted that the combined effect of Hurricanes Harvey and Irma produced that result.  This is the first drop in employment since September 2010, but it does not mean much.  It is important to remember that the establishment survey is taken in the week that contains the 12th of the month.  Employees who are not paid for the pay period that includes that date are not counted as employed.  But those workers will be back on the job next month at which time we should expect an employment gain of perhaps 350 thousand.  For what it is worth the hiring decline occurred almost exclusively in the food services and drinking places category where employment contracted by 105 thousand.  Despite the September drop American consumers have not stopped eating out or given up drinking.

At the same time that BLS reported that payroll employment declined by 33 thousand in September, it then said that household employment, from which the unemployment rate is determined, jumped by 906 thousand in September.  Huh?  That is a pretty wide discrepancy.  What are we supposed to believe? Did employment increase?  Or decline?   In this case, it is important to understand that in the household survey people are counted as being employed even if they miss work for the entire survey period.  As noted, household employment actually increased 906 thousand in September but that follows a decline of 74 thousand in August.  This series is always volatile.  Over the two months combined the average increase in household employment was 406 thousand compared to an average increase in the preceding 12-month period of 164 thousand.  No sign of any softening in the household employment data.  Thus, it is hard to argue that the payroll employment data for September are in any way indicative of emerging weakness in the labor market.

The third important takeaway from the September employment report is that average hourly earnings are beginning to rise.  Upward pressure on wages has been conspicuously absent thus far, but that seems to be changing.  Hourly earnings rose 0.5% in September after rising 0.2% in August and 0.5% in July.  In the past year wages have climbed 2.9%.  With the sole exception of December 2016 that is the largest increase in hourly earnings since June 2009.  And, note also, that in the past three months wages have climbed at an even speedier 4.3% pace.  It seems like upward pressure on wages has finally arrived.

This series would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.4% pace.  Any way you slice it, wages pressure are finally beginning to quicken.

Given that labor costs represent about two-third of an employer’s total costs, it stands to reason that if wages are on the rise, there will be a tendency for firms to raise prices as well.  Hence, a likely increase in the inflation rate.

At the same time manufacturing and non-manufacturing firms are paying higher prices for the raw materials they use in production.  The chart below reflects prices pressures reported by manufacturing firms.  All 18 industries reported paying higher prices in that month.  And the price gains were widespread from metals like steel and aluminum to food ingredients, electronic components, lumber and wood products, chemicals, and plastics.

The price increases for non-manufacturing firms are equally impressive – both dramatic and widespread.  These higher prices will boost the PPI data for September and October and, presumably, begin to push the CPI higher by yearend.

For the Fed’s Open Market Committee members the missing ingredient has always been the lack of upward pressure on the inflation rate.  But all of that seems to be changing.  Wages pressures are mounting.  Commodity prices are on the rise.  The Fed has indicated that it is willing to live with an inflation rate higher than its 2.0% target for a period of time because it has run below target for so long.  However, these recent developments will also suggest that it needs to keep gradually raising the funds rate back towards its presumed neutral level of 2.7-3.0%.  They plan one more rate hike later this year, presumably in December.  They anticipate three more rate hikes in 2018 which would boost the funds rate to the 2.0% mark by the end of next year, and further increases to the presumed neutral level by the spring of 2020.

So despite the modest decline in payroll employment, the September employment report is, in our opinion, not nearly as benign as that particular figure might suggest.  The labor market continues to add jobs to the tune of about 180 thousand per month, and wages pressure are beginning to intensify.  Further, but gradual, increases in the funds rate are in store.

Stephen Slifer


Charleston, S.C.

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