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Katrina Will Keep Jumbling Job Data

By Rick MacDonald The impact of the catastrophic late-summer hurricanes continues to be felt in U.S. economic data. In particular, distortions from the storms will continue with the October

employment report, scheduled for release Nov. 4. The market will focus on the size and shape of these distortions in the employment report to get a better read on the labor market's underlying conditions. It will again likely be easy to tell either an optimistic or pessimistic story, given inherent uncertainty about the degree to which the storms may have affected the headline nonfarm payrolls figures.

We at Action Economics expect a gain of 150,000 in payrolls for the month, though lower market forecasts -- and the 110,000 median estimate of economists we surveyed -- reflect clear downside risk. But whatever job-growth figures are reported for September and October, we believe they'll reflect an underlying 150,000 to 250,000 growth trend for payrolls.

The rest of the figures in the October release are expected to be relatively inert, with unchanged levels of 5.1% for the unemployment rate and a 33.7 hour workweek. Both of these forecasts are in line with median estimates. In addition, hourly earnings should rise in line with the 0.2% median forecast.

NO ORDINARY DISASTER. One reason to expect a notable payroll bounce after the hurricane is precedence. Payrolls generally fall short of the underlying growth trend in the survey period that captures the hurricane, but then rebound in the months afterward. Interestingly, the workweek doesn't tend to be affected. In addition, the return of about 20,000 Boeing (BA) workers after striking machinists reached a settlement of the aerospace outfit will add to the swing in October.

But Katrina was far from an ordinary hurricane, because of the quick follow-up by Rita, the outsize infrastructure impact, and the huge energy-price surge that affected the economy outside of the region. All these factors imply an unusually prolonged hurricane effect. The continued elevated level of

initial jobless claims and ongoing claims through the October survey period bear this out and suggest downside risk to payrolls.

Weakness in various consumer-confidence measures also implies downside payrolls risk. Both the University of Michigan's consumer sentiment and the Conference Board's consumer confidence surveys bucked expectations for a rebound in October and instead deteriorated further. The current-conditions series from the Michigan survey, which tends to follow labor market trends, dropped to 91.6 in the final October reading from the preliminary level of 95.7 and September's 98.1.

FACTORY WORK. Similarly, the October "jobs hard to get" component of the Conference Board survey rose to 25.3, from a revised 25 in September, while "jobs plentiful" improved to 20.8, from 20.7. The data left the "job-strength" index (the difference between the two series) at -4.5 from -4.3. This level marks the lowest reading of the year.

But other data have been more encouraging. The most recent Help Wanted index rose to 39 from 38. The Hudson Employment Index rose 3.7 index points, to 100.5. Most important, the factory sentiment surveys all revealed a strong tone in October. Specifically, the employment component of the Institute for Supply Management survey jumped to 55 from 53.1 in October, which marks the highest level since February, and bodes well for the factory and temporary employment numbers over the near term.

Given the momentum in the economy and historically lean level of inventories, there appears to be strong support for a return of hiring in the factory as well as factory-sensitive sectors, like mining and transportation.

MISSING DATA. We would also note that the Bureau of Labor Statistics' unusual treatment of the distortions in September also supports upside possibility in October. The BLS prepares the monthly jobs report. In September, any business the BLS couldn't reach in the affected areas was assumed to have zero employment. This likely depressed the September payroll figure by more than was actually the case.

By the October period, many of these businesses were likely able to be contacted, with many having probably put in place alternative employment workarounds. This increase in contact, and more time for workarounds, should provide for a stronger figure in October.

Overall, it's unlikely that the market will get much mileage out of the report. Any surprise will be quickly written off as a continued hurricane distortion. The market doesn't have much choice but to wait and see to what degree the rebuilding efforts over the coming months take hold.

Given the solid tone in the economic data before the hurricanes struck, the huge inventory draw-down currently in place, and strength in October factory figures, the outlook remains encouraging. There's a good chance that subsequent employment reports will reflect that strength, following the distorted numbers for September and October.

MacDonald is global director of investment research and analysis for Action Economics

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