KEY DATA: Payrolls: +134,000; Private: 121,000; Revisions: +87,000; Unemployment Rate: 3.7% (down from 3.9%); Wages: +0.3%/ Trade Deficit: up $3.2 billion; Exports: -0.8%; Imports: +0.6%

IN A NUTSHELL: “The labor market remains strong despite the weak payroll increase, as witnessed by the lowest unemployment rate since December 1969.”

WHAT IT MEANS: The big, bad U.S. jobs machine sputtered in September but before you start looking for the next recession, relax. First of all, the gains for July and August were revised upward sharply. Given the paucity of free agent workers, the three-month moving average of 190,000 is closer to a sustainable level than what we had been seeing. While BLS didn’t see any major impact in the survey sample from Hurricane Florence, the large decline in the hospitality sector could have been the result of weather-related closings. On the other hand, the surge in state government payrolls was a surprise that is not likely to be continued. More fundamentally, hiring was strong in construction, manufacturing, health care, real estate, warehousing, transportation, professional and business services, indicating the increases were broad based. The average hourly wage was up solidly, but this number is largely meaningless, despite the fact that it is widely followed. As for the unemployment rate, the decline to 3.7% was impressive. Keep in mind, the last time the rate was this low was in the middle of the Vietnam War when an awful lot of young adults were in the military, not in the workforce.

There was another number released today that will likely disappear in the noise over the employment report: The trade deficit, surprisingly, widened sharply. And the reasons were not good. Imports rose modestly but exports tanked. Foreign sales of soybeans tanked, as expected, as did petroleum-based products, computers and vehicles. We did export more drugs and civilian aircraft.   On the import side, we bought more petroleum products, vehicles, cells phones and industrial machines but purchases of food, crude oil and computer accessories dropped. Even adjusting for price changes, it looks like the trade deficit widened significantly in the third quarter, greatly slowing growth.

MARKETS AND FED POLICY IMPLICATIONS: The employment data are volatile, so don’t read much into the soft topline number. But also don’t think that wage gains below 3% over the year are an accurate measure of true compensation pressures. Firms are using benefits and nontraditional means to try to retain and attract workers and the average hourly wage, which I have written about many times, is simply incapable of measuring those changes. Businesses of all sizes are indicating they are doing whatever they can to keep their workers and while they are trying like crazy not to raise wages quickly, overall labor cost increases are accelerating. The standard measures just don’t reflect those increases well if at all. So don’t think the Fed will look at a faulty average hourly wage number and not be worried. They are and will continue raising interest rates. And the faulty number may not stop the rise in longer-term rates either. The last time we saw 10-year rates this high was in 2011. While I think the gap up in rates was too great, any pull back is likely to be followed by further increases, though more slowly. Whether investors worry about that is to be seen.