The September jobs report missed on the headline job growth number, but upward revisions to the prior two months offset any disappointment from the headline miss. Monthly job gains totaled 136,000, missing the 145,000 expectation. However, revisions to the prior two months added 45,000 jobs including August which went from 130,000 to 168,000. However, offsetting much of the positives from the job growth numbers, wages were flat on the month versus a 0.3% forecast and well off the 0.4% gain in August. The year-over-year gain dipped as well to 2.9% versus the 3.2% expectation. The 2.9% rate is the lowest in fourteen months and as we’ve mentioned before, wage gains seem to be plateauing around 3.0%-3.2% after running at 3.4% earlier in the year. The unemployment rate dropped two-tenths to a new cycle low of 3.5%. In summary, the continued slowing in job growth and flat wages have increased the odds of a 25bps rate cut later this month, as the employment report and this week’s ISM readings point to some slowing in economic momentum. The fixed income market, however, views only limited stimulus potential from further rate-cutting actions, and with governments worldwide distracted by other events (i..e, impeachment inquiry, Brexit, Hong Kong protests) any hopes of material fiscal stimulus being added to the equation remains a pipe-dream. That argues that the lower rate trend will continue.
For the month, 136,000 jobs were created missing the 145,000 forecast. The September number is a sequential decline versus August’s 168,000 gain (revised up from 130,000). The prior two months’ were revised up by 45,000 jobs which softens some of the headline miss for September. Over the past year, monthly job gains averaged 173,000 so September reflects another miss versus the average and the sequential dip shows that hiring momentum is slowing.
Away from the headline job growth numbers, wages were a disappointment. Average hourly earnings were flat on the month missing the 0.3% forecast, while year-over-year earnings fell to 2.9%, the lowest YoY rate in fourteen months. Wage gains appear to be plateauing in the 3.0% to 3.2% range versus moving materially higher as was the case earlier in the year. February’s 3.4% YoY gain remains the high for this cycle and with the slowing in job gains that February print could be the high for this cycle. That pales in comparison to the 4.0+% YoY gains in expansions past. That means demand-pull inflation is unlikely to accelerate and that should keep inflation docile enough to allow additional rate cuts by the Fed.
Meanwhile, the unemployment rate dipped two-tenths to 3.5% (actually 3.517% vs. 3.687% in August) after spending three straight months at 3.7%. The 3.5% is a new cycle low. The Household Survey—which is used to generate the various employment ratios— saw 275,000 persons leave the ranks of the unemployed (5.769 million versus 6.044million) while 117,000 persons were added to the labor force denominator (164,039 million vs. 163,922 million). If the GM strike continues into the mid-month survey period the 48,000 strikers will move into the unemployment calculation which is likely to bump it up a tenth on its own. Just something to remember when the number is released next month.
Meanwhile, the broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) dipped to a new cycle low of 6.9%. As mentioned, unemployed persons decreased by 275,000 and part-time workers decreased by 31,000 and 265,000 and were subtracted from the ranks of the marginally attached (those willing to work but not actively looking). The directional movement in the rate and the components all point to a tightening labor market so the lack of wage gains is no doubt puzzling, but the Fed will likely say that it will resolve itself in higher wages at some point if the labor market tightening continues.
The labor force participation rate (labor force divided by civilian population) remained at 63.2% after rising two-tenths to 63.2% in August. The stable reading this month was driven by the 117,000 person increase in the labor force while the civilian population rose by 206,000 persons. While the current rate is at the cycle high, it still pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.2% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.
In summary, the release as a whole was better than expected after the pair of gloomy ISM reports earlier in the week that revealed the slowdown in manufacturing was deepening and starting to bleed into the larger services sector. While the job growth numbers were decent, the unchanged reading in wages and dip to 2.9%YoY reflects a labor market still operating with some slack. In any event, odds of a 25bps rate cut at this month’s FOMC meeting are 79% and odds of a fourth cut by December are at 51%. Both represent material moves after the somewhat hawkish cut at the September meeting.
Are Average Hourly Earnings Leveling Off?
One of the guiding lights to monetary policy has been the thesis that as job gains build, wage gains will follow and those additional wages will push inflation higher. And while wage gains have improved steadily since 2012, they remain just below pre-recession levels and appear to be leveling off around 3.0%. The slowing momentum in job gains is also likely to be a headwind against additional wage gains, especially if the loss of momentum continues to deepen. The demand-pull inflation the Fed has expected from mounting wage increases could prove elusive and provide another backstop to bond prices as inflation fears diminish.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||1.71%||-0.10%||1 Mo LIBOR||2.00%||-0.03%||FF Target Rate||1.75%-2.00%||3 Year||1.371%|
|6 Month||1.65%||-0.19%||3 Mo LIBOR||2.06%||-0.03%||Prime Rate||5.00%||5 Year||1.339%|
|2 Year||1.41%||-0.22%||6 Mo LIBOR||2.02%||-0.04%||IOER||1.80%||10 Year||1.446%|
|10 Year||1.54%||-0.14%||12 MO LIBOR||1.95%||-0.06%||SOFR||1.85%|