September Employment Report

KEY DATA: Payrolls: +248,000; Private: +236,000; Unemployment Rate: 5.9% (down 0.2 percentage point); Hourly Wages: down $0.01

IN A NUTSHELL:  “Firms are hiring but that has yet to translate into any increase in wages.”

WHAT IT MEANS:  The greatly anticipated September employment numbers did not disappoint, unless you were hoping for some wage pressures.  Payroll gains were well above expectations, but the headline number actually understates the increase because there were large upward revisions to both the July and August totals.  There were a total of about 69,000 more jobs created in those two months than had been initially estimated.  If you add the 38,000 additional jobs in the August report to the 248,000 added in September, the net gain was 286,000.  (I had 289,000, so I feel pretty good, especially after last month’s debacle.)  Given the NFIB’s report that small business hired heavily in September and those increases only trickle in, I would not be surprised if the September job increase was also revised upward.  Over the past twelve months, businesses have added over 2.6 million new positions, the largest increase since May 2006.  The rise in payrolls was distributed across the economy.  Construction was up solidly, but the rise in manufacturing was less than expected.  Retailers, restaurants, personnel service firms, trucking companies and health care providers all added positions solidly.   States are also back into hiring mode.

The best news was that the unemployment rate dropped below 6% for the first time since July 2008.  (I expected a 6% number.)  Yes, the labor force participation rate dropped, as did the labor force, but the number of people employed soared and the number unemployed dropped sharply.  In any event, I have explained, ad nauseam, why this whole discussion is absurd so let it go.  What was disappointing was the lack of any increase in wages.  The labor market may be tightening, labor shortages may be appearing, but firms are still holding the line on wages.   

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report.  The economy averaged nearly 225,000 new positions over the past three months, which is pretty solid.  So, why is the growing job demand not showing up in worker compensation?  Part of the issue may be measurement and part structural.  Salary increases are not granted uniformly across the year.  They tend to be bunched at review times, which could be quarterly, semi-annually or annually.  There may be labor shortages, but in-between reviews, wages are not going to rise unless a worker can get another job and leverage the offer.  For those on contracts, wages are fixed until the contract ends.  Since the government reports average wages, any increases by the additional workers may not move the needle a whole lot.  That doesn’t mean wage pressures aren’t building.  It just means that when they show up, they will not rise smoothly.  They could gap up.  If the Fed waits for wage gains to appear in the data, they will be well behind the curve.  Wages have always been a lagging indicator and with businesses still convinced that they can hire people at the wage they want to pay rather than the wage they have to pay to actually get the person, it will take extreme shortages before businesses thrown in the towel.  But when they do, watch out.