US September payrolls “a big miss”; Fed November taper likely anyway

Summary: Non-farm payrolls increase by 194K in September; well below expectations; previous two months’ figures revised up by 169K; jobless rate down to 4.8%, participation rate ticks down to 61.6%; “a big miss” but upward revisions, lower jobless rate, higher hourly wages counteract; jobs-to-population ratio increases to 58.7%; jobs growth “should be sufficient” for Fed to taper; underutilisation rate falls from 8.8% to 8.5%; annual hourly pay growth increases to 4.5%.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been generally more modest but still well above the long-term monthly average.

According to the US Bureau of Labor Statistics, the US economy created an additional 194,000 jobs in the non-farm sector in September. The increase was well below the 500,000 which had been generally expected earlier in the week and just over half the 366,000 jobs which had been added in August after revisions. However, employment figures for July and August were revised up by a total of 169,000.

The unemployment rate fell from August’s rate of 5.2% to 4.8%. The total number of unemployed decreased by 710,000 to 7.674 million while the total number of people who are either employed or looking for work decreased by 184,000 to 161.354 million. The decline was enough to tick the participation rate down from August’s rate of 61.7% to 61.6%. NAB currency strategist Rodrigo Catril described the report as “a big miss” but noted previous month’s revisions, the lower jobless rate and higher hourly wage growth “resulted in a relative subdued reaction by markets…”

Longer-term US Treasury yields rose moderately on the day. By the close of business, the 10-year bond yield had gained 4bps to 1.61 and the 30-year yield had increased by 3bps to 2.16%. The 2-year yield unchanged at 0.31%.

ANZ economist Hayden Dimes said, “Average jobs growth this year should be sufficient to keep the Fed tapering announcement on track for next month.”

NAB’s Catril agreed, stating “the inner strength in the report suggests the numbers have past the Fed’s test for a “reasonable enough” report to allow for a QE tapering announcement in November.”

One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. September’s reading increased from 58.5% to 58.7%, still some way from its April 2000 peak reading of 64.7%.

Wage growth spiked in the US during the early stages of pandemic restrictions as lower-paid jobs disappeared at a faster rate relative to higher-paid jobs, disrupting the usual relationship between wage inflation and unemployment rates. Normally, wages tend to grow as the supply of labour tightens.

One measure of tightness in the labour market is the underutilisation rate. In September, this measure fell from 8.8% to 8.5%. Hourly pay growth over the previous 12 months accelerated from August’s revised rate of 4.1% to 4.6%.

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