US jobs report: party like it’s 1969

Below the disappointing headline, the September jobs report was quite strong. Topline payroll growth declined to 134,000; Hurricane Florence likely explained the weakness. About 300,000 people were out of work because of bad weather, compared to 85,0000 out of work because of bad weather in an average month. Upward revisions added 87,000 jobs over the last two months translating into a stout 190,000 three-month moving average pace.

The labor market is getting to be one of the tightest on record. The unemployment rate dropped two-tenths of a percentage point to 3.7%, the lowest level since 1969. According to J.P. Morgan, the unemployment rate for those workers out of a job for less than six months is the lowest since the 1950s! The broadest measure of unemployment, U6, while declining, has yet to breach the low reached in 2000.

Manufacturing added 18,000 jobs, a positive after weak job gains last month. In fact, goods-sector job growth has been accelerating as the pace of service job growth has flatlined. The continued strength in manufacturing suggests that trade tensions have had a negligible effect on hiring thus far. Temporary help added jobs for a third month in a row, a good sign for future job growth.

The drop in the unemployment rate came as the labor force participation rate held constant at 62.7%. Over the last few years, a lot of analysts expected the labor force participation rate to decline given the USs aging population. But a continual flow of workers from the sidelines back into the labor force has kept the participation rate steady. Throughout the period, the participation rate for prime-age workers accelerated. Strong flows into the labor force have supported robust job growth despite the unemployment rate getting very low.

Year-over-year, average hourly earnings decelerated modestly. Wages ticked up sharply last September in part because of Hurricanes Harvey and Irma, making a tough comparable for this September. But on a three-month annualized basis, average hourly earnings are up 3.75%, the second highest pace of the cycle, only behind last September’s temporary surge. Average weekly wages were up 3.4%, matching the fastest pace since 2010. Lots of leading indicators suggest that wage growth will continue to modestly accelerate in the coming quarters.

The robust jobs market is part of the reason why we think there may be room for more upward surprises for the US economy. If wage growth moves up more than expected, there may be scope for consumer spending to accelerate. Consumer spending has been constrained by muted pay growth. If that trend ends, some pent-up demand from consumers could be unleashed. A sustained pick up in productivity would likely keep inflation pressures controlled even as wage growth rises. That would mean that real household incomes would pick up, another welcome surprise. Faster wage growth could even bring more potential workers off the sidelines, supporting the already robust pace of job growth even longer.

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