September Employment Report Raises Odds of a December Fed Rate Hike

The September Employment Report raises the odds of a Fed rate hike in December, despite the hurricane-related temporary decline in Payrolls.  The Household Survey appears to have been much less affected by the bad weather and shows a very strong labor market.  And, while the hurricane and technical factors were likely behind the jump in Average Hourly Earnings, some factors working to boost AHE may continue in the next few months. 

The stock market will likely resume its rally, as it realizes the underlying economy is strong (as seen in the high prints for the Mfg and Non-Mfg ISMs).  Expectations for Q317 corporate earnings, in the 6% y/y range, should not change.  And, hope for tax reform should remain.  Treasury yields and the dollar should stay supported by these considerations, as well.   

Although the 33k decline in September Payrolls was clearly caused by the hurricanes, other factors also played a role in the weak job growth.   In particular, retail jobs fell for the 2nd month in a row, reflecting the shift to internet shopping from brick-and-mortar stores.  Retail jobs are likely to remain weak for the rest of the year -- especially in November and December -- as retailers already have announced less holiday hiring planned for this year than last.

Besides holding down payroll growth, a downshift in relatively low-paid temp help should boost Average Hourly Earnings in the next few months -- a compositional effect.  Also, some retailers said they would rely on higher-paid overtime to handle the holiday crowds.  This impact from the retail sector should partly offset the unwinding of the hurricane-related boost to AHE in September.  The hurricane-related boost was likely responsible for 0.2% pt of the 0.5% jump in AHE, as the largest m/m payroll decline was in relatively low-paid accommodation and food services.  Calendar effects are neutral for both October and November.

The Bureau of Labor Statistics stated that that the Household Survey was not significantly affected by the hurricanes, unlike the Payroll Survey.  The BLS said, its "analysis suggests that the net effect of these hurricanes was to reduce the estimate of total nonfarm payroll employment for September.  There was no discernible effect on the national unemployment rate."  There were no changes to survey procedures.  The Household Survey counts people as employed even if they miss work for the entire reference period.  And, both the Payroll and Household Surveys do not include Puerto Rico or the US Virgin Islands.