Payrolls contracted by 33,000 last month due to the impacts of hurricanes Harvey and Irma. The unemployment rate, which BLS tells us was not affected by the storms, fell to 4.2 percent, its lowest rate in over 16 years, and it fell for “good reasons” last month, i.e., not because discouraged workers left the labor force. In fact, the closely watched labor force participation rate rose to 63.1 percent, its highest level since March of 2014.
Thus, to evaluate the strength of the current US job market, look at the unemployment rate, not the negative payroll number. The former is on trend; the latter is a weather-induced outlier. Another important and strong indicator from September, also one that was unlikely to be influenced by the storms, was the healthy bump to employment rates of prime-age (25-54 year-old) workers, a closely watched indicator in this recovery. Overall, it climbed from 78.4 to 78.9 percent, the highest since July of 2008. For men, it went from 84.9 to 85.5, the highest since August 2008. For women, the employment rate went from 72.1 to 72.4.
Wage growth was above trend last month, as average hourly wages rose 0.5 percent over the month and 2.9 percent over the past year. This spike is also likely hurricane related, reflecting the fact that lower-paid workers tend to be the ones not paid when they can’t get to work, and thus they dropped out of the average wage calculations last month. As I’ll show below, the trend in wage growth remains slightly north of 2.5 percent.
More evidence of the storms’ impacts can be seen in restaurant employment. BLS points out that while jobs in food services and drinking places have been rising at a decent clip of around 25,000, last month they declined by 105,000. The Bureau reported that, “In this industry, a large majority of workers are not paid when they are absent from work. Hence, if these employees were unable to work during the September survey reference pay period because they had evacuated, or because their establishments were not open for business due to power failures or other effects of the hurricanes, they were not included on September payrolls.” This dynamic dampened the job numbers and boosted the wage results.
Thus, the impact of the storms are the most important message from this month’s report. The Texas and Florida hurricanes were clearly responsible for the negative low topline employment number, a decline that is not indicative of a sharply worsening trend in job growth. Prior to this morning’s report, the BLS pointed out that “about 11.2 million workers were employed in March 2017 in the FEMA-designated disaster counties and represented about 7.7 percent of national employment” (about 70 percent in FL and the rest in TX). Estimates suggest that employment growth last month might have been 100,000-150,000 higher had the hurricane not so severely disrupted commerce directly in Texas and Florida and indirectly in other parts of the country (note: Puerto Rico is not included in the monthly national employment report; the island is included in the state job report out later in the month).
Another way to show this negative impact is to look at the number of people whose absence from work was weather-related. The spike shown in the figure below is the largest in this series in 20 years, according to BLS.
Historically, severe weather disruptions akin to those in September are short-term, temporary events, and we expect the job numbers to bounce back up to their underlying trend of about 150,000 per month within another month or two (e.g., hurricane Katrina’s impact lasted about two months in the national data).
To get a better feel for the underlying trend, our monthly smoother takes averages over the last 3, 6, and 12 months. While the hurricane impact is part of the average in each bar, it is only 1/6th or 1/12th of the second two bars, which thus give a better impression of the trend.
Given the outlier data for September’s payrolls, this is a good moment to take a closer look at the statistical noise in the monthly job numbers. This month’s smoother shows a new twist – the horizontal black lines depict the upper and lower bounds of the 90 percent confidence interval around the 1-month, 3-month, 6-month, and 12-month estimates. Given how large the potential range is for 1-month estimates – BLS estimates that we had something in between 153,000 jobs lost and 87,000 jobs created in September – relying on longer-range estimates makes more sense. As noted above, we’re still averaging about 150,000 jobs per month over the past year.
Wage growth remains more subdued than expected given the historically low unemployment rate. The trend lines below (six-month moving averages) show that wage growth clearly accelerated from 2 to 2.5 percent between 2015 and 2016, and since then has stalled out at around that level. Part of this is reasonably attributable to low productivity growth, but based on my analysis, even with low productivity growth, nominal wages should be growing at least half-a-percent faster right now.
In sum, the low unemployment rate reveals a solid job market that, despite large storms that were devastating for many, is still closing in on full employment. The trend in payroll employment, about 150,000 or so, is strong enough to continue tightening the job market, which, if it proceeds apace, should generate more wage pressures. That’s an essential dynamic to watch for, as many workers are only now beginning to reap the benefits of an economic expansion that’s been underway for nine years.