The reaction to Friday’s labor market report was sharp and swift. Bond yields, especially on the long end of the yield curve rose and stocks sold off. The yield on the 10-year Treasury note ended the week at 3.23%, its highest level since April 2011. The financial markets fear that the Fed now has sufficient support from the economic data to continue raising the Fed Funds target rate by another quarter point in December and perhaps as many as three more quarter-point increases in 2019.
The market was reacting primarily to the drop in the unemployment rate to 3.7%, its lowest level in nearly 50 years. Yet, the report provided several signs that the pace of job creation is slowing. Non-farm payrolls increased by 134,000 jobs in September, the smallest increase in a year. The three-month average of non-farm payroll increases, which smooths some of the month-to-month volatility, has declined modestly since the summer and is now roughly even with the previous January 2018 low.
The decline in the unemployment rate, which is based upon data from the household survey, is due to a surge in estimated employment which greatly exceeded the estimated change in the civilian labor force. Data for September shows that household employment increased by 420,000, much greater than the estimated increase of 150,000 in the civilian labor force. Although the labor force participation rate held steady at 62.7%, the unemployment rate dropped by two-tenths of a percent to 3.7%. The household survey data has been surprisingly volatile recently – for example, employment was estimated to have dropped by 423,000 in August and then surging by 420,000 in September -, so it would not be surprising to see a rebound in the unemployment rate back to 3.9% in the remaining months of 2018.
Similar conclusions can be drawn about the 3.4% year-over-year increase in average weekly earnings. The gain was up two-tenths of a percent from 3.2% in August. The components – average hourly wages times average weekly hours – were both up on the month. Average hourly wages increased 2.8% to $27.24, a slightly slower gain than August’s 2.9%; while average weekly hours increased 0.6% to 34.5. It turns out though that the strong gain in average weekly hours was due in part to a previous downward revision in the prior year’s estimate from 34.4 hours to 34.3 hours. That 34.3 hours looks like a blip and the comparisons will be less easy in the remaining months of the year. Consequently, unless the pace of gains in average hourly wages increases, the gains in average weekly earnings will moderate throughout the course of the year.
Prior to 2018, the gains in employment were on a steady downward trajectory, which is to be expected given the long duration of the current economic expansion. As it turns out, 2018 has seen a resurgence in employment gains, which is almost certainly due to the positive benefits of the Tax Cut and Jobs Act (TCJA). Yet, the boost provided by TCJA is temporary and so will also diminish over time. Rising interest rates are also starting to slow the economy, especially in interest-sensitive sectors such as housing and autos. In my view, September’s jobs report provides some evidence that the deceleration in employment gains may have already begun.
October 8, 2018
Stephen P. Percoco
Lark Research
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