Hurricanes hurt hiring data but wages way up

The September employment report was disrupted by Hurricanes Harvey and Irma. Harvey caused extensive flooding in the Houston area, while Irma impacted most of Florida and, worse for the employment data, hit during the survey reference week.

Thus, it was widely expected that payrolls would be softer than usual. Even so, the September employment figures were full of surprises. The trick is figuring out what can be attributed to the storms and what reflects underlying fundamentals.

{mosads}The job count turned out to be considerably softer than anticipated. In fact, payrolls dropped in September, the first negative monthly reading since 2010. However, the evidence was pretty clear that this was due predominantly to the storm impacts.

In particular, restaurant payrolls dropped by a whopping 105,000, almost twice the magnitude of the monthly decline seen in the wake of Katrina. Restaurant workers are more likely than most to drop off the payroll count for a month because they engage in shift work, which means they only get paid when they actually work (the BLS only counts a worker in its payroll tally if they were paid during the survey reference period).

Several other categories that could logically have been expected to see weakness due to the storms were modestly lower than prior months as well. Anecdotal reports indicate that demand for labor remains strong, so payrolls should bounce back sharply in October.

The second big surprise was a surge in average hourly earnings. For much of this year, anecdotal reports and surveys have pointed to a very tight labor market and building upward pressure on wages, but the aggregate data on hourly pay has been puzzlingly soft.

However, the entire wage picture changed in the blink of an eye this morning. The July wage advance was revised from 0.3 percent to 0.5 percent, and the August increase was nudged higher from 0.1 percent to 0.2 percent.

To top it off, wages shot up by 0.5 percent in September, though, to be fair, the effects of the hurricanes may have boosted last month’s rise. Still, the upward revisions to July and August were certainly not impacted by Harvey or Irma, and it is hard to imagine that September’s surge was inflated by more than one-tenth.

In any case, the year-over-year advance in average hourly earnings, which was reported as 2.5 percent a month ago, accelerated all the way to 2.9 percent, matching the cycle high seen late last year. Thus, while we may see a slight pullback in October, once the hurricanes’ impacts have waned, the bulk of the wage pickup appears likely to reflect strong underlying fundamentals.

Finally, the unemployment rate declined by two-tenths of a percentage point to 4.2 percent, the lowest reading since 2001. The Labor Department noted that it did not believe the hurricanes had any impact on the jobless figure (unlike for the payroll survey, the household survey, which is used to derive the unemployment rate, counts people as employed as long as they say they have a job, i.e., whether they actually get paid in the month or not).

The household survey gauge of employment surged by over 900,000 last month, while the labor force expanded by over half a million. Thus, the data continue to show that the labor market is tightening, and if any “slack” remains at this point, it is minimal.

I would expect unemployment to drop below 4 percent at some point next year, a mark that has rarely been seen (only two relatively brief stints over the past 50 years).

So, the bottom line from today’s data is that while there is plenty of short-term noise associated with the hurricanes, the report underscores that the underlying picture remains strong. Labor demand is robust, the pool of available workers has dwindled and as a result, wages are beginning to accelerate.

The economy is certainly not overheating yet, but the labor market is headed in that direction.

Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker dealer providing institutional and middle-market clients with access to fixed-income products.