Highlights:
- Payroll employment in September dropped 33k following the 169k increase in August though greater strength in the household employment survey contributed to the unemployment rate dropping to 4.2%.
- The annual increase in wages jumped to 2.9% though it may have been distorted by the hurricanes.
Our Take:
The impact of Hurricanes Irma and Harvey was clearly evident in today’s report as the monthly tally for September payrolls was much weaker than expected declining 33k following the reported 169k gain in August. The BLS, which compiles the data acknowledged that the two hurricanes had a clear downward impact on the job count though was not able to provide a precise estimate of the hit. However, the BLS did point out that food services component sank 105k in September compared to a trend gain of 24k over the prior twelve months. The BLS noted that this sector is particularly vulnerable to weather-related disturbances as "a large majority of [these] workers are not paid when they are absent from work." This suggests that this single component likely biased down September payrolls by almost 130k and indicative that underlying payroll gains remain solidly positive in the month. Underlying strength in September labour markets was also conveyed by the unemployment rate dropping more than expected to 4.2% from 4.4% in August. The unemployment rate is based on the separate household survey where individuals unable to get to work due to adverse weather are still counted as ’employed.’
The continued underlying strength in labour markets augurs well for overall GDP growth to continue to increase at an above-potential rate. This pace of activity will likely be abetted by the repair and rebuilding work that will ensue in the wake of the damage to from both hurricanes. With the 4.2% unemployment rate reported today indicative of labour markets operating at capacity, the Fed will likely see the need to continue to tighten policy. Thus today’s report reinforces our view that the fed funds range will be hiked 25 basis points in December with four similar-sized increases through 2018.
