A big question for the Federal Reserve—and Wall Street—regarding the Oct. 5 release of the September U.S. employment report: Will an expected bounce in government jobs growth and upward revisions to past payroll figures diminish the significance of the shockingly weak August release? The September report is seen as a pivotal piece of the policy puzzle for the Fed as it weighs whether to cut interest rates again on Oct. 31.
But the report may ultimately disappoint those hoping for another easing. All indications are that the August jobs report overstated weakness in the economy as indicated by ensuing reports, including the ADP employment survey for September released Oct. 3, leaving room for mostly good news in the September data.
Action Economics expects nonfarm payrolls to post a 120,000 September gain, vs. a 4,000 decrease in August, while the average workweek holds at 33.8 hours, and average hourly earnings increase by another solid 0.3%. However, the unemployment rate is expected to tick higher to 4.7% from 4.6% in the preceding month.
Government payrolls should bounce by at least 45,000, with potential for upward revisions in the last two months, given the odd 82,000 drop over the last three months that likely reflected seasonal distortions in education employment. Meanwhile, a modest 75,000 gain in private payrolls should allow for a 120,000 rise in the headline nonfarm payrolls figure.
Following are some of the key indicators that factored into our forecast:
The September ADP employment survey revealed a 58,000 gain that translates to a 123,000 nonfarm payroll gain, if you assume a 45,000 September bounce in government payrolls following the massive June-July-August shortfall in teacher employment, and a 20,000 downward bias in the ADP figures relative to private payrolls. The figures are almost exactly in line with our 120,000 payroll forecast.
Looking at other labor market indicators, the weekly jobless claims data have moved back to surprisingly lean levels in September, consistent with a healthy labor market. Initial claims are tracking a month-average for September of 311,000, compared to 324,000 in August; 307,000 in July; 319,000 in June; 306,000 in May; and 327,000 in April. Initial claims reached a 313,000 level during the Bureau of Labor Statistics' survey week for September—during which the data for the jobs report is compiled—compared with survey-week readings of 325,000 in August; a lean 303,000 reading in July; 326,000 in June; 296,000 for May; and 341,000 for April.
The current conditions component of the University of Michigan's consumer sentiment index fell in September, and the full array of data from the Conference Board's survey fell sharply, which suggests downside risk to the September jobs report. Yet the declines appear to reflect the headline effects of credit market turmoil rather than worsening underlying conditions. The overall Michigan sentiment index held up well through September, as did most other confidence measures.
Many of the employment measures in the various September factory sentiment surveys weakened in September, but remained at respectable levels. The Empire State employees index rose to 18.2 from 11.6, though the workweek fell to 9.6 from 16.1. The Philadelphia Fed survey's employees index fell to 7.5 from 21.2, while the workweek moderated to 11.9 from 13.1. The Chicago PMI employment component fell to 52 from 53.7. The ISM employment component was little changed at 51.7 from 51.3. The employment index in the ISM non-manufacturing survey actually bounced in September to 52.7 from 47.9 in August, which bodes well for employment in this large sector of the economy.
Given that these employment components in the various factory surveys missed the weakness reported in last month's factory payroll data, the pullback in some of these series in September may reflect a lagged impact, with little new signs of weakness.
To be sure, there is some risk that negative financial market headlines may result in a pause in some hiring decisions, and layoffs in the mortgage industry could weigh on job growth over the near-term. But overall, much of the weakness in payroll growth over the last three months has reflected a swing in government payrolls that is now likely to be reversed.
In fact, rather than focusing on the overall number of jobs created in September, the markets should focus on the more modest, yet still worrisome, moderation in private employment growth in recent months. Here the data are, at least thus far, showing a moderation that reflects a gradual cooling of economic growth rather than a jarring slowdown prompted by the credit market turmoil of August.