- The most recent reports from the Bureau of Labor Statistics give conflicting pictures of employment data.
- Despite payroll gains, the overall quality of hiring is generally poor and the labor force participation rate dropped.
- The economy appears to have weathered the government shutdown surprisingly well, but remains stuck near 2% growth.
After all the angst and hand-wringing over the impact of the government shutdown on the October employment data, we are left with two very divergent pictures. On the one hand, the Establishment Survey left an unambiguously positive footprint with encouraging news. However, this was contradicted by the Household Survey which looked muddied and weak, clearly suffering some impact but with other worrisome details. The BLS considered furloughed Federal workers “employed and on the payroll” for the Establishment Survey, but they also considered them “unemployed on temporary layoff” in the Household Survey. Hence, there was clear disconnect between the two surveys due to different rule counts and other data collection misclassifications. It is unclear if the weakness in the Household Survey will reverse next month, as it typically does not revise data histories.
The reported gain of 204K new payroll jobs crushed expectations, together with 60K upward revisions to prior months. Obviously there was a modest drag from government job cuts of 8K, all at the Federal level. However, gains in goods producing industries excelled with manufacturing (+19K), construction (+11K) and mining (+5K) all above trend. This is good news as these are higher wage industries. But the strongest gains were seen in the retail (+44K) and the leisure/hospitality (+53K) industries, noted for both lower wages and hours. So generally the quality of the hiring remains poor on balance. Professional/business also added 44K with fewer temporary and more permanent jobs. Importantly, the 3-month average gain has jumped to 202K and the 6-month average has held near 170K or higher for the last 12 months (for the first time this recovery). Annualized job growth is now up 1.74%, and it was only higher than this for a few months back in 2012. This certainly underscores that the economy weathered the government shutdown surprisingly well despite a hit to business and consumer confidence. But these gains still reflect an economy stuck near 2% growth.
However, there were numerous distortions in the Household Survey. The unemployment rate ticked up slightly to 7.3% from 7.2%, as did the Underemployment Rate to 13.8% from 13.6%. There was a plunge in the civilian employment (-735K) with most actually leaving the labor force (-720K) and the remainder (17K) moving into the unemployed category (but still in the labor force). Some of the losses were due to the 507K temporarily laid-off (furloughed) government workers. However, there was a shocking drop of 0.4% in the participation rate to 62.8%, the lowest since 1978. Persons “not in the labor force” swelled by 933k, a result of those 720K who exited the labor force together with the entire 213K increase in the working age population in October. Changes of this magnitude are rare, and many were workers who indicated they did not want a job. Most interesting was the fact these were primarily men aged 20 – 34 years (ie, not retirees). Without the decline in the participation rate, the unemployment rate would have risen to 7.9%. It’s hard to get any sense of trends here considering the disruptive impact from the shutdown, and much depends on where the participation rate settles in the next few months. This leaves me thinking the Fed will also wait and allow the foggy labor data to clear.
One final note on the third quarter GDP report released this week. The advance reading of 2.8% was flattered by an inventory build which will likely reverse next quarter. The inventory contribution is always a potential swing factor and often overstates growth. We’ve seen inventory gains for three consecutive quarters—unusual for the second half of a business cycle. As a result, Q4 GDP will be a little lighter on this in combination with the shutdown drag. PCE (personal spending) was soft, up only 1.5%, and the smallest rise in two years. Unfortunately, business spending actually pulled back, the first decline in a year, as uncertainty is still restraining spending. Residential investment and housing remains a support (up 15%) and trade contributed positively to growth as net exports advanced. The fiscal drag is also waning with a small net add from state and local purchases. Trend growth still looks near 2% based on the rise in Real Final Sales (GDP less inventories is a good proxy for underlying demand). There is no sign of near term acceleration yet, particularly in light of tempered consumer spending and curtailed business spending. But the lighter fiscal drag alone will pull the trend above 2% next year. If capex kicks in even a modest amount and the labor market advances enough to pull consumer incomes higher, underlying growth trend could move even higher.