The September Employment Report was solid despite slower than expected job growth. There were strong upward revisions to prior months and a larger than expected drop in the unemployment rate. Hurricane Florence probably dented hiring in some sectors as well, which should reverse in the coming months.
The decline in the unemployment rate to a near 50-year low reflects the Household Survey’s measured 270,000 decline in unemployment coupled with the 150,000 increase in the labor force. In the Household Survey, employment rose 420,000, reversing August’s 423,000 fall. Labor force participation rate remained at 62.7%. We expect the overall labor force participation rate to remain steady in coming years as the rise in prime working-age participants outweighs the drag from an aging population. The prime working-age labor force participation rate ticked down by 0.2% to 81.8% in September, but its 2018 average is 82%, on pace to be the highest since 2010.
The broader measure of labor underutilization, U-6, which measures the total unemployed plus marginally attached workers along with part-time workers for economic reasons, is at 7.5%, near its all-time low of 6.8% recorded in 2000.
The softer than expected gain in establishment payrolls in September reflects several temporary factors. First, the Bureau of Labor Statistics’ first estimate of September non-farm payroll growth has consistently underperformed expectations only to be revised up in subsequent reports, a pattern similar to August (Chart 5). Second, Hurricane Florence dented measured jobs, but by a lesser extent than the bigger hurricanes of September 2017. According to the BLS, the swing from August—from +21,000 to -17,000—in leisure and hospitality jobs likely reflects this impact. Also, 313,000 persons were not at work because of weather—a sizable amount but less than in September 2017.
Job growth has accelerated this year after decelerating in three prior years. If the labor market were as tight as implied by the Fed’s estimate of full employment, job growth this strong would likely place significant upward pressure on wages. Our research shows that the potential labor supply is sizable and elastic, especially along prime working-age persons. As business demand for workers continues to rise, attractive wages and benefits are luring a growing number of persons from the sidelines back into the workforce (See “Rising US prime working-age labor participation”). We expect average hourly earnings to rise to 3% by year-end. The combination of gains in employment and moderate increases in wages is lifting disposable incomes.
“Job growth has accelerated this year after decelerating in three prior years.”
The goods-producing sector added 46,000 jobs in September, with construction employment increasing by 23,000, bringing its 2018 total to 214,000. This is despite the constant complaints about the shortage of construction workers and manufacturing jobs increasing by 18,000 and remaining on track to surpass the 2017 gain. The 2018 year-to-date gain is 189,000 compared to 207,000 for 2017. However, the service-providing sectors added a below-trend 75,000 jobs after the massive 217,000 August gain. Jobs in leisure and hospitality (-17,000), education and health services (+18,000), retail (-20,000), and wholesale trade (+4,000) underperformed, while jobs in transportation and warehousing (+24,000), financial (+13,000), professional and business services (+54,000) were strong.
Mickey Levy is the chief economist for the United States, the Americas, and Asia at Berenberg Capital Markets, LLC and a member of E21's Shadow Open Market Committee (SOMC). The views expressed in this column are the author’s own and do not reflect those of Berenberg Capital Markets, LLC.
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