October 6, 2017

News in Charts: Upward Revisions to US Earnings Increase the Already-High Odds of a December Rate Hike

by Fathom Consulting

Today’s jobs report may have shown a 33,000 drop in nonfarm payroll employment in September, but the US dollar, Treasury yields and the probabilities that investors assign to a rate increase in December all rose. At first glance, these movements seem somewhat surprising, as it is widely known that the monthly change in payroll employment was affected by Hurricanes Harvey and Irma. Moreover, the payroll gains reported in the previous two months were revised lower, which would normally prompt the opposite market reaction, all else equal. Investors may have focused on the increase in average hourly earnings in September, but even these might have been distorted by the storms. Closer inspection of the data, however, reveals that earnings in earlier months were revised higher. This suggests that wage pressures may have been building a little faster than we and the Fed previously thought. The already-high probability of a rate increase in December seem to have risen following today’s release.

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In a note to clients last week (see Fathom Consulting, ‘What to expect in next week’s nonfarm payrolls report’), we cautioned against reading too much into today’s job figures. After all, even the Bureau of Labor Statistics (BLS) acknowledged that they were unsure of how to quantify the impact of the hurricanes, and that since nearly 11 million workers were employed in FEMA-designated disaster counties, representing around 8 per cent of national employment, there would be a sizeable impact on the figures. The BLS indicated that they would need to make several assumptions on the weather-distorted data. The large decline in the growth of the nonfarm payrolls following Hurricane Katrina in 2005 led us to believe that a large drop this month was imminent. The recent initial jobless claims figures, which have risen sharply in Texas and Florida, also suggested that many people would be unable to work as a result of the storms.

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Today’s release showed that employment in leisure and hospitality fell by 111,000, which compares with an average monthly increase of 26,000 over the last year for these sectors. These are industries in which the large majority of workers are not paid when they are absent from work. Significantly, they would not be counted as employed if they were unable to work during the payroll survey week (i.e. the week containing the 12th day of the month, which happened to be the same week that Hurricane Irma made landfall). This large deviation from the recent trend therefore appears to confirm that the headline figures were greatly distorted by the recent hurricanes.

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The 0.5% month over month increase in average hourly earnings reported in September, which pushed up the annual change in average hourly earnings to 2.9%, a ten-month high, points to a tightening labour market. However, it is possible that September’s earnings figures may have also been affected by the storms, a point acknowledged by the BLS today. Nevertheless, there were upward revisions to earnings in the previous two months which resulted in the annual change in average hourly earnings in August being revised up from 2.5% to 2.7%, suggesting that wage pressures may have been building a little faster than we (and the Fed) previously thought. Other economic data released this week, including the ISM business surveys and vehicle sales, were also positive and increase the odds that the Fed will tighten policy again this year. (For more, please see Fathom Consulting, ‘Spike in US auto sales in September points to solid Q3 and Q4 GDP growth’.)

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