Sep Employment Report Does Not Confirm Markets' Drastic Reaction to Mfg ISM

The September Employment Report does not confirm the markets' drastic take on the sub-50 Mfg ISM earlier this week.  It confirms a slower trend in job growth, but one that is still strong enough to push down the Unemployment Rate.  Despite the tighter labor market, wage inflation remains in check -- although technical factors likely helped depress Average Hourly Earnings.  If the markets force the Fed to ease at the October 29-30 FOMC Meeting, the Report argues that it would do so by only 25 BPs. 

The +136k m/m increase in September Nonfarm Payrolls is well below the +171k 3-month average ending in August.  Excluding government jobs, Private Payrolls rose 114k versus the 135k prior 3-month average.  But, both the September and recent trend job gains are above the near-100k m/m needed to keep the Unemployment Rate steady (assuming no increase in the Labor Force Participation Rate).  Moreover, the cyclical components -- construction, manufacturing and mining -- were altogether up slightly m/m in September and do not confirm the markets' fears of recession.  In particular, the September Industrial Production Report should show flattish Manufacturing Output excluding the GM Strike-related drop in motor vehicle production.  (Manufacturing jobs rose 2k, excluding motor vehicle jobs).

The Report supports expectations of modest Real GDP Growth in Q319, and does not rule out stronger growth in Q419.  Total Hours Worked (THW) rose 0.8% (q/q, saar) in Q319.  Adding 0.5-1.5% for Productivity Growth shows that 1.5-2.5% range is not an unreasonable expectation.  To be sure, the GM strike in H2 of September will subtract from Q319 GDP, so a print in the lower end of the range may have a better chance of printing.  But, THW's take-off point for Q419 is good.  The September level is 0.8% (annualized) above the Q319 average.  So, at this point, a speedup in Q419 Real GDP Growth cannot be ruled out.

The drop in the Unemployment Rate to 3.5% also argues that GDP Growth is above trend.  Even the broader U-6 measure of labor market slack fell to 6.9% -- only the 2nd time since the series began in 1994 when it reached that level.  The decline in Unemployment resulted from a jump in Civilian Employment more than offsetting a moderate increase in the Labor Force.

The 0.0% m/m September Average Hourly Earnings was the risk, based on calendar considerations and some unwinding of August's out-sized +0.4%.  The y/y fell to 2.9% from 3.2%.  Calendar considerations suggest a 0.1-0.2% print in October, which should put the y/y at 2.9-3.0%.  Note, however, that AHE is the narrowest of the major measures of labor costs.  So, the low prints may not tell the whole story.