Financial Insights

Looking Through the Storm: The Employment Situation Report

The BLS released September’s non-farm payroll data which showed a decline of 33,000 jobs in the month of September, the first decline in the number of employees in the U.S. since 2010. The economy previously had experienced 83 consecutive months of job growth, suggesting an economic growth cycle so persistent it took two hurricanes to tighten the reins and knock its progress off course. The markets anticipated the weak headline number and finished Friday’s session little changed. Because of the extraordinary weather, the employment decline seen in September should be nothing more than temporary. It is likely that a greater than average number of job gains will occur in the coming months as many workers will return to their homes in Florida and Texas and get back to work.

Looking beneath the headline number some interesting details emerge. Restaurant and bar workers were the most heavily affected portion of the labor force, as 105,000 fewer workers were recorded in this sector compared to August. This makes intuitive sense as most restaurant workers are non-salaried and need an open and operating business in place in order to earn a wage. This large decline should reverse course once repairs are made and communities return to storm damaged areas.

Despite the terrible damage inflicted by the string of powerful hurricanes and the decline in employees, the unemployment rate declined to a cyclical low of 4.2% from 4.4% in August. In addition to the low unemployment rate, wage growth was higher than recent trend, coming in at a 2.9% annual rate. However, this is probably weather driven as mix in total employment shifted due to the aforementioned restaurant employees, who are generally lower wage employees than the average. In spite of this possibly inflated growth rate, overall wages have been growing at a sustained higher rate recently. Since the beginning of 2016, the average increase in wages has continued to grow at above 2.5% per year (see blue line in chart below). This higher rate has followed a prolonged period of sluggish wage growth in the aftermath of the credit crisis. The sustained higher rate of wage growth is a good sign for the American consumer and provides some evidence of an increase in real wages beyond recent trends as the inflation rate has not risen commensurately to offset nominal wage gains. The chart to the left shows clear evidence that recent signs of tightness in the labor market have increased wage costs for employers. The current pace of wage growth still remains moderate compared to other expansionary periods in recent history. However, the demand (high number of openings) and supply (few available workers) dynamics of the labor market are starting to have a greater impact on the price of labor.

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The Federal Reserve will view much of the data in this report with skepticism due to the impact of weather related factors. Chair Yellen clearly communicated the Fed will look past the temporary impact in Q3 caused by the storms. GDP should be weaker than expected and employment will be noisy for a while as laborers head back home. However, despite the noisy data, it is still very likely that the Fed will increase rates in December. The current market probability of a hike is estimated at 78.5% for December as of Friday.  Beyond the storms and often disturbing headlines in the news, the technocratic Fed will remain data dependent. The current data suggest a resilient U.S. economy which is growing at a steady pace, creating jobs, and producing little observed price inflation. These developments are decidedly positive news.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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