The US labour market was weaker than expected in September. Employment rose by 142K up from 136K the previous month. The unemployment rate was unchanged at 5.1%.
We think this report will not substantially change the view of the Fed regarding the strength of the labour market. However, a sustained improvement in the job market in the coming months will be needed to support our view of a rate hike in December.
Job report weaker than expected
The September payroll report was weaker than expected. Nonfarm employment increased 142K, below the 212K average for the first eight months of this year. There were also downward revisions in the previous two months amounting to 59K. The other key aspects of the establishment survey were also a bit disappointing. Average hourly earnings were unchanged from an increase of 0.4% the previous month. This left the year-on-year increase unchanged at 2.2%. Other aspects of the report showed that the unemployment rate remained at 5.1% in September. This occurred alongside a participation rate that edged down to 62.4%, from 62.6% the previous month. Broader measures of underutilisation improved, as persons employed involuntarily part-time for economic reasons ticked down to 10%. Overall, we see the labour market shifting down slightly, but after a period of robust job creation.
Goods-producing sectors remain weak
Goods-producing sectors have been having some hard times in the previous two months, with employment dropping 13K in September, after falling 22K in August. Manufacturing employment remains weak (-9K). Meanwhile, Job growth in the service sector showed some improvement, gaining 131K. Leisure and hospitality continue to look healthy (+35K), together with retail trade (+24K).
Average hourly earnings, were unchanged (0%). On a year-on-year basis, wage growth was 2.2%, also unchanged from the previous month. We think that slower productivity growth could be keeping wages supressed, since higher wages in a context of slow productivity growth reduce profit margins.
Yellen asks for sustained improvement in job market
As for the Fed, we think this report will not change the view of the central bank regarding the strength of the labour market. It, however, puts more weight on the incoming job market reports to be released before the December meeting. It will take now a sustained improvement in the labour market to keep a December rate hike on track. Chair Yellen mentioned during her latest intervention on “Inflation Dynamics and Monetary Policy”, a sustained improvement in the labour market was needed, despite that the unemployment rate may now be close to its longer run normal level – around 4.9%. A sustained labour market improvement, according to Chair Yellen, should reduce slack in other dimensions, including labour force participation rate and persons employed involuntary part-time from economic reasons.
Market expectations of rate hike dampened
Following the jobs report, according to futures markets, investors priced in a slightly lower probability of Fed rate hikes this year, leading to lower short-term Treasury yields. Indeed, October is off the table now. Investors see an 8% likelihood of an increase during the October FOMC meeting compared with 16% before the jobs report. The odds are now 28% in December compared to 36% previously.