US reaction to latest payrolls data

David Page, Senior Economist at AXA Investment Managers (AXA IM), comments on the latest US payrolls data.

Key points

  • Payrolls data has been distorted by the impact of Hurricanes Harvey and Irma.
  • Payrolls declined by 33k in September, far below an expected 80k gain and its first recorded decline since 2010. The 200k drop from the previous three-month average was in line with the reaction seen in the wake of Hurricane Katrina in 2005.
  • Payrolls join a run of data to have been disrupted by the storms, including ISM (Institute of Supply Management) series, housing and auto sales.
  • Unemployment fell to an 18-year low of 4.2%, despite an increase in labour supply. A volatile surge in household survey employment was the cause, but looks set to reverse over the coming months.
  • Average earnings growth also rose to 2.9% in September, the fastest pace recorded this year. August’s (pre-storm) figure was revised higher to 2.7% (from 2.5%).
  • Markets dismissed most of today’s report, but yields and the dollar edged higher with some glimmers emerging of faster wage growth.   

September’s payroll report was always going to be taken with a pinch of salt. The extensive damage caused by Hurricanes Harvey and Irma has led to a significant distortion in jobless claims labour data and, looking back to the aftermath of Hurricane Katrina in 2005, payrolls growth fell back to 67k and 84k in the immediate aftermath (from a run rate average of 270k over the previous three months). On the face of it, payroll growth appears to have behaved similarly this time around. September recorded payroll growth falling by 33k, from an upward revised 169k (from 156k) in the previous month. This deceleration from a 3-month run rate of 170k is the same 200k deterioration recorded in 2005. A detailed analysis of the State-by-State data will provide a better guide to how much of this reflected a hurricane impact. The decline was driven primarily by drops in manufacturing employment growth (-42k), leisure & hospitality services (-111k) and professional and business and education and health services (-48k).         

The hurricane distortions have obscured the underlying labour market trend. In 2005, payrolls were depressed for two months following the storms and jobless claims figures suggest that some impact may continue to be felt in next month’s release. Today’s payroll figures are the latest in a series of data to have been distorted by the storms. These have included surges in ISM series – the non-manufacturing ISM’s recent rise reaching levels last seen in 2005! Home and auto sales numbers have also been affected, making it difficult to extrapolate any new signals in these trends from the noise. However, even allowing for this, today’s payrolls posted a couple of noteworthy developments despite concerns about noise.      

While hurricanes had a negative impact on payrolls growth, the household employment survey surged. It rose by 903k in September – its largest posted gain since November 2013. This resulted in unemployment falling back to 4.2% - its lowest recorded rate since February 2001. That drop in unemployment came despite a large gain in labour supply (0.4% m/m), which pushed the participation rate to its highest level - 63.1% - in 3½ years. The household employment survey is much more volatile than the establishment survey and large gains are usually preceded or followed by similar size declines. The scale of any retracement in this series will be important in determining if unemployment is set to rise from its near 18-year low. The U-6 measure of ‘underemployment’ also fell back further to 8.3% from 8.6% and nearer to its 2006 cyclical low of 7.9%.  

Additionally, average earnings accelerated to 2.9% from an upward revised 2.7% in August (from 2.5%). It is possible that September’s move has been distorted by the storms and we will have to see if this pace of growth is maintained into year-end. However, the upward revision in August’s annual rate to 2.7%, preceding storm distortion and recording the second fastest growth rate of the year so far, was some evidence that the tightness of the labour market might finally be beginning to generate wage pressures.

Financial markets posted some reaction to the release with the 2-year and 10-year yields up by 2 basis points to 1.52% and 2.39% respectively and the dollar rose modestly against a basket of currencies. Although markets were braced to dismiss most of today’s developments as likely storm distorted, the lower unemployment and rising earnings growth does appear to have added to expectations of monetary policy tightening. For sure, the Federal Reserve (Fed) is likely to treat developments in these months cautiously, but earnings and unemployment developments look likely to add to arguments to continue with a gradual removal of accommodative policy. Markets now price an 80% chance of a further 0.25% Fed Funds Rate increase by year end and currently price a greater than 50% chance of a further hike by June next year. Our own view remains a forecast for a December hike and two hikes across 2018.  

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