• US adds 134,000 jobs in September
• Wages rose 0.3% mom, 2.8% yoy
• Unemployment rate dropped to 3.7%, its lowest level in 49 years
• Payroll growth slows but would not blow the Fed off course

US non-farm payrolls (NFP) disappointed in September, with 134,000 new positions created. However, the September let down was mitigated by a net upward revision of 87,000 jobs to July and August. The increase in hiring was the smallest in 12 months and below the recent trend, perhaps reflecting the effects of Hurricane Florence. The US has added an average of 208,000 jobs a month through the first nine months of 2018, above the 182,000 paces during the same nine-month period last year.

Turning to the industry detail, a slowdown in services sector hiring was behind the September softness. Services hiring cooled to 75,000 new positions, down from 217,000 in August. Several services sectors saw a weaker pace of hiring including retail trade (-20,000), education & health (+18,000) and leisure and hospitality (-17,000). Meanwhile, hiring in the goods-producing sector accelerated in September, gaining 46,000 new jobs. Both construction (+23,000) and manufacturing (+18,000) posted solid growth in September.

US unemployment rate dropped to 3.7% in September, down from 3.9%. That’s the lowest level in 49 years. Participation rate was unchanged 62.7%. Average hourly earnings rose 0.3% on the month, a decent follow-through on the 0.3% jump in August. Unfavorable base effects meant the year-on-year growth in wages dipped to 2.8% from 2.9%.

The unemployment rate dropped two ticks to 3.7%, a new cycle low. Indeed, we have to go all the way back to 1969 to find a lower unemployment rate. The overall labor force participation rate remained unchanged at 62.7%.

Payroll growth slows but would not blow the Fed off course

Every so often we get a below-trend month in hiring, and this is more common in September. We will reserve judgement until the next report before worrying about a slowdown in hiring. In any case, the US labor market remains strong. Unemployment is the lowest it has been in nearly 50 years, and wage gains are making headway. Going forward, employers will find it increasingly difficult to find workers to fill positions, muting monthly payroll gains, and we would expect to see a natural slowing in monthly job gains. The increase in pay over the past 12 months slowed to 2.8% from 2.9%, but it’s widely expected to top 3% soon because of the growing competition for a shrinking pool of available workers.

Meanwhile, other employment data do not give any sign of the labor market weakening, let alone to the extent of September’s payrolls. Job openings and the share of businesses reporting they have at least one position that is hard to fill sit at record highs, as does the hiring index in the ISM non-manufacturing survey. At the same time, the near 50-year low in initial jobless claims points to firms hanging on to workers, given the difficulty to re-hire later on.

The decline in the unemployment rate to 3.7% and upward march in wage growth will keep the FOMC pressing ahead with rate hikes. There is little doubt that the full employment half of the Fed’s dual mandate is right on track. And the latest employment report is consistent with another hike in December.

Source: BIMB Securities Research - 8 Oct 2018