This note was originally published November 08, 2013 at 12:13 in Macro
So, there are basically two kinds of economists/pundits. Those that acknowledge and accept the unpredictability of both the monthly BLS employment data and the market’s reaction to it and liars.
The fact that the October employment data would be hostage to a host of distortions –higher sampling error, seasonality in education hiring, and government shutdown impacts on gross hiring, hours worked, the headline and U-6 unemployment rates - has been pretty well advertised (BLS).
Given moderate estimates (+120K) and the expectation for negative impacts from the government shutdown, the balance of risk heading into the release was to the upside as a weaker number could be explained away by the aforementioned distortions while a higher number (in spite of the negative drags) would drive renewed policy uncertainty.
Optically, the October Employment figures were solid. But since the prevailing lens with which the market is filtering the payroll data is less a fundamental one than one with an eye towards the implications for prospective Fed policy adjustment, its perhaps best to take a brief cerebral sojourn and interpret today’s release through the eyes of a Fed head.
That interpretation would probably read something like this:
The labor market data is good, but not great – with that “goodness” up for debate given the distortive effects of the shutdown. The unemployment rate remains above target, Labor Participation remains at trough levels (although it’s partly a secular/demographic driven), inflation is still well below target and wage inflation remains subdued. Fiscal policy will remain an uncertainty/headwind through at least February of next year, credit market liquidity is in decline, and housing/credit activity has slowed subsequent to the expedited back up in rates that followed our last hint at incremental hawkishness.
If past is precedent, such an interpretation = no policy change without further confirming evidence.
THE DATA: Steady with an extra side of caveat….
STEADY GROWTH: As we highlighted alongside the September release – while the absolute NFP numbers have been trending lower since 1Q13, on a rate of change basis, the YoY growth and 2Y growth rates have been relatively stable over that same period – a dynamic largely stemming from the existent seasonal distortion in the data.
This dynamic held in September has employment growth held steady while absolute net job gains declined sequentially. October again looks similar with the 2Y growth rate holding right in line with trend. We continue to expect seasonality to drive strengthening headline improvement in the employment data over the next 6 months with peak positive impact occurring in March
A TALE OF TWO SURVEY’S: The largest oddity in today’s release was the massive divergence between the household survey (which drives the Unemployment Rate), which showed net job loss of -732K, and the headline strength in the Establishment survey (which drives the NFP figure) which showed a net gain +204K with a positive two month net revision to Aug/Sept of +60K.
Further, while the Establishment Survey showed accelerating improvement and job gains across all industries except wholesale Trade, the Household survey reflected decelerating payroll growth across all age cohorts, a 720K decline in the total labor force and another new low in labor participation.
What do you do with that? Practically, we’ll probably just have to wait for next month’s data to get a “cleaner”, confirmatory read on Trend.
SHUTDOWN IMPACT: The impact of the government shutdown appears to have shown up primarily in the temporary layoff tally which increased by +435K on the month.
Elsewhere, U-6 Unemployment ticked up to 13.8% from 13.6%, part-time employment continued to decline, state and local government employment growth continued to accelerate, and hourly earnings growth and ave hours were essentially flat sequentially.
Takeaway: Alongside the continued strength in the initial jobless claims data, the BLS employment figures reflect ongoing, albeit moderate, improvement in the domestic labor market. The odds of today’s data shifting the course of policy action in the immediate term seems unlikely. We continue to navigate heightened policy uncertainty, and the resultant market volatility, with our lowest gross and net exposures of the year.
PERSONAL INCOME & SPENDING: TREND IMPROVEMENT
Personal income increased 0.5% MoM in September, outpacing spending growth of +0.2% while the savings rate increased to its highest level since December of 2012 ahead of the government shutdown.
From an intermediate term perspective, the trend improvement in personal income growth remains encouraging for forward consumption. Personal Income & personal disposable income growth are both rising, Per Capita DPI is accelerating and the household savings rate is moving higher.
Notably, the positive improvement in income is occurring despite the discrete drag from government where budget cuts are driving the largest decline in government employment growth in decades and negative income growth for approximately 17% of the workforce.
If negative growth in government employment bases and government sourced personal income growth goes positive alongside some measure of budget resolution (i.e. sequestration alternative), consumption growth could see meaningful support in 2014.
Christian B. Drake