Hurricanes likely pulled down jobs growth
We expect the jobs report for September due on Friday will show below trend progress in the labour market due to hurricanes Harvey and Irma. Although we still see underlying strength of the labour market as solid, job creation is usually negatively affected following major hurricanes. We expect employment rose 90,000 in September (although uncertainty is higher than usual) against a 12-month moving average of 175,000 and we expect a broad-based slowdown in job creation. In our view, the negative impact on the labour market should be short-lived, as we have already seen initial jobless claims are beginning to come down again. We do not expect to see a decline in the unemployment rate (although risk is probably skewed towards an increase). Finally, we estimate average hourly earnings to be relatively unaffected by the hurricane season and hence expect an increase of 0.2% m/m, implying wage growth rate of 2.5% y/y, unchanged from August. We expect markets to mainly look at average hourly earnings and not so much nonfarm payrolls and unemployment, unless they surprise on the upside.
While most labour market indicators are now strong, the slack indicators still suggest there is some slack left in the labour market, as the numbers of marginally attached and part-time workers for economic reasons are still high and long-term unemployed is still elevated (see also the spider web chart on the next page). This also suggests that the unemployment gap is not closed yet. One reason might be that people on the edge of the labour market do not have the necessary qualifications, as there are many positions, which businesses are unable to fill.
Fed says it looks beyond weak data due to hurricanes
By announcing ‘quantitative tightening’ and keeping the ‘dot’ signal unchanged at one hike this year and three next year, the Fed showed that it still wants to tighten monetary policy gradually, see also FOMC review: Unchanged hiking signals as QT is set to begin next month, 20 September. Despite weak inflation and subdued wage growth, the Fed still thinks it is appropriate to raise rates, as Yellen still has strong belief in the Phillips curve mechanism (tighter labour market will push up wage growth and hence inflation eventually).
It is also worth noting that the Fed has explicitly stated that it does not expect the impact of hurricanes Harvey and Irma to play a role in its monetary policy decisions, since it expects them to impact economic activity only in the short term. This means that we should not see a sharp market reaction to a weak jobs report since it will likely not affect monetary policy.
We expect the Fed to hike once more this year in December due to the focus on the unemployment rate and easy financial conditions.
