Overall, the September employment report points to the US labour market making good progress in trying circumstances. This momentum and apparent risks argues for a November taper announcement.
The September US employment report was, in some respects, very close to our expectations, but in others, completely counter. We anticipated participation would continue to lag in the month, leading the unemployment rate to fall. Indeed, in September, participation underperformed and unemployment outperformed, declining by 0.1ppt and 0.4ppts respectively, leaving the unemployment rate at 4.8%. Also underlying this result for the unemployment rate was another robust gain for household survey employment, up 526k in September after August’s 509k.
The supplemental data from this survey echoes the uncertainty on labour supply shown by the participation rate. In September, the proportion of workers teleworking because of the pandemic remained little changed at 13.2%, while 1.6 million people not currently in the labour force reported being unable to look for work because of the pandemic, equivalent to 1% of the labour force.
The household survey employment and unemployment rate outcomes are therefore a strong vote of confidence in the US labour market. However, they conflict with the headline outcome from the Employment Situation report, the nonfarm payrolls print.
For the second month in a row, at 194k, nonfarm payrolls came in at a fraction of the consensus estimate and the month-average gain for 2021-to-date, 561k at September.
Looking at the industry detail, there was one particularly noteworthy outcome. Despite the rapid re-opening of schools, September saw the loss of 180k jobs in education after seasonal adjustment (144k and 17k at the local and state government level, and 19k in the private sector) because job creation in the sector was notably weaker than it typically is at the start of the school year.
As the economy continues to re-open, significant catch-up hiring seems likely in this sector, with the BLS reporting that education payroll employment is currently 676k lower than in February 2020. Similar expectations can be justified for health and retail, among others, these two sectors having payroll counts 524k and 202k lower than February 2020.
Note, not only does it seem the pandemic is getting in the way of participation and employment, but also sampling. Highlighting this, the August gain for payrolls employment was revised up almost 60% in the September report, from 235k to 366k. It seems likely that the downside surprise seen in September will also be quickly made up through back revisions and/or an outsized gain(s) in coming months.
Looking ahead, even with a 1.2ppt rise in participation between now and end-2022, the US ‘only’ needs to create around 500k jobs per month to regain ‘full employment’, with an unemployment rate of 3.8% forecast by both the FOMC and Westpac at that time. As the two years prior to the pandemic saw average monthly payroll gains of almost 190k while the unemployment rate was at or below 4.0%, 500k of job gains per month in recovery is certainly achievable.
Overall, despite the headline payroll disappointment, there is enough strength and possibility in the underlying data to warrant the FOMC formally announcing a taper at their November meeting. The past fortnight has provided another very good reason to take this path: fiscal uncertainty.
The first step in monetary normalisation must be taken confidently and with clear focus. Neither is possible amid fiscal malaise, again to be seen in December given the short extensions granted for the debt ceiling and spending authority. History and political imperative tell us that, in the end, these procedural issues will be resolved. But amid fiery partisan debate, confidence is easy to unnerve, and attention swayed.
Further, note that, while we do not believe inflation will become a problem for the FOMC, the risks and market angst are clearly biased to the upside. This is true for wages too, with average hourly earnings currently up 4.6% versus a year ago. Increasingly accommodative monetary policy also risks financial stability, particularly with respect to house prices and household debt.
With the labour market making clear progress and given the above risks, it would be inappropriate to delay the taper decision until 2022 to wait out fiscal uncertainty. If the next step was a rate hike, arguably such a decision could be justified. However, the taper only slowly reduces the provision of additional support to the economy; it does not reduce it.
