KEY DATA: Payrolls: +194,000; Private: +317,000; Public Education: -149,000; Revisions: +169,000; Unemployment Rate: 4.8% (down 0.4 percentage point); Wages: +0.6%; Hours Worked: +0.2 hours
IN A NUTSHELL: “Other than the volatility in the education sector, this was actually a good report, as the labor market continues to firm.”
WHAT IT MEANS: Stop. Don’t look at the September headline jobs number or you will be totally confused. Yes, it was disappointing on the surface. But as I always say, the information is in the details, so let’s look at them. Start with the payroll numbers. The private sector added a lot of new workers. That is critical given the extreme shortage of labor that employers are claiming is out there. Apparently, firms are finding people to hire, though clearly not as many as they would like. The low headline number was largely due to the education component, which has apparently lost its past seasonality. Schools are opening at a different pattern than in the past, so we had seasonally-adjusted 257,000 workers added in July, and a 150,000 cut in September. Don’t believe either one of those numbers. However, the rise of 130,000 over the past three months does make sense. That shows how you really need to follow the 3-month moving average and not focus on one-month worth of data. Speaking of which, the private sector average monthly job gain over the past three months is 488,000, which shows that hiring continues to be robust. Finally, revisions to previous reports added a lot of workers not counted previously, so let’s simply accept the fact that that the headline is totally misleading.
There are other parts of the employment report that also point to a very strong labor market. The unemployment rate fell sharply, though not for all the right reasons. Employment jumped and unemployment declined significantly, which if good. But the labor market contracted, which was disappointing. In a normal strong market, the labor force expands. COVID seems like the obvious explanation. Still, we are back to the January 2017 unemployment rate. The labor market is nearing full employment. As for the ending of the extended unemployment benefits, it may be too soon to see any impact, but for now, it looks like the theory that ending the special pandemic benefits would make workers more available is just that, theory.
Finally, average hourly wages surged and are up a robust 4.6% over the year. In addition, hours worked jumped. Together they point to a large increase in income.
IMPLICATIONS:The September employment report paints an accurate picture of the labor market. Firms are hiring like crazy, but with the labor force stagnant, the number of available workers is shrinking. As a result, the unemployment rate is dropping and with the demand for workers outstripping the supply, wages are soaring. This has major consequences for the Fed. First, with income surging, consumer demand should remain solid, so don’t look for any massive slowing in growth. Second, labor costs are not coming down anytime soon, and when you combine that with the rising input costs from the broken global supply chain and strong demand, the Fed’s hopes for a near-term moderation of inflation are fading. I think Chair Powell is finally getting to understand that, as he is indicating he thinks high inflation could go into next year. Now we need the him to start thinking that it could last well into next year. Until he does, he will be sounding like a clueless politician, rather than a Fed Chair. Forty miles of ships waiting offshore to unload in California point to a pretty messed up supply chain. Mr. Powell needs to start preparing the markets for the possibility that inflation could last a lot longer than he has been arguing it would. I suspect that will start at the next FOMC meeting on November 2,3. Look for the Fed to announce the start of tapering and possibly a larger cut in purchases than is currently expected. That would indicate the Fed is serious about withdrawing its stimulus and the members recognize the threat that an extended period of high inflation presents for growth and interest rates.