The noisy and contradictory September job report is not going to keep the Federal Reserve from increasing rates in December. The pickup in wage growth must have surprised most members of the monetary-policy committee (FOMC): is this a sign that Yellen wage “mystery” is going away? It is too soon to jump to conclusions, but the dot plots indicate the most probable rate path in 2018. I would not be surprised if EUR/USD moves to 1.14 end of 2017.
Ignore the noise, focus on wages
Guessing how the twin hurricanes impacted the September job report was always an impossible task, and the decline of 33,000 in non-farm employment was more than 100,000 off consensus expectations. However, 1.5 million people were unable to work due to bad weather in the reporting period, so the headline number should just be ignored. BLS writes that “A sharp employment decline in food services and drinking places and below-trend growth in some other industries likely reflected the impact of Hurricanes Irma and Harvey.”
Non-farm payrolls should also be ignored due to the eye-popping numbers coming from the household survey, where people are counted as employed even if they are unable to work for the entire reporting period (the headline numbers stems from the establishment survey). According to the household survey the economy generated 906,000 jobs in September, and the difference to the non-farm payroll number of 939,000 is the second highest ever recorded – only January 2000 was higher.
The household survey also showed that 575,000 people entered the labor force – a bit strange when many were internally displaced by the hurricanes. But the participation rate jumped 0.2 percentage points to 63.1% and the unemployment rate declined to 4.2%. I would not be surprised if some of these gains are reversed in coming months, but for now the labor market looks a bit tighter.
Wage growth surprisingly strong
A tighter labor market was also reflected in wage growth. Wage increases in August were adjusted up to 2.7% y/y and rose further to 2.9% in September for all employees (2.5% for production and non-supervisory workers). This jump could partly be a result of the high share of low-payed hit by the hurricanes, but that does not explain the adjustment in August.
Of the four sectors I follow most closely, wage growth picked up in retail and construction and declined in manufacturing and leisure. Construction wages could be pushed up further when rebuilding gets under way as migration from Mexico and Central America has declined sharply. I expect wages to give back some of the gains in August and September, but this sudden move is likely to cause anxiety among hawkish members of the Federal Reserve, even if I don’t expect wage growth to break out of the 2.5-3.0% range.
What to expect going forward
The October job numbers could also be impacted by internal displacement in Texas and Florida and continued disruption to businesses. That will be reversed, when activity is restored later in the year. Moreover, the underlying economic fundamental appears to be strengthening, and while I expect a major part of business investment to be in productivity enhancing technology (to avoid rising labor costs), healthy job creation should be supporting growth in coming quarters.