Job Data: Outside the Hurricanes' Path
By Michael Englund
The physical impact of Hurricanes Katrina and Rita was devastating, but the storms appear to have caused less spectacular damage to the U.S. labor market. The September employment report, released Oct. 7, held no downside surprises.
Indeed, the report pointed to outright strength in the underlying nonfarm payroll trend through the hurricanes. These factors will allow financial markets to focus squarely on inflation and rebuilding as we approach yearend.
The payroll drop of only 35,000 in September, following 77,000 in upward revisions in the July and August job figures, left little doubt that the more dramatic estimates of hurricane distortions swirling around Wall Street over the past month were wildly overblown.
The Boeing (BA ) machinists' strike alone accounted for a hefty 20,000 of the September drop, and we know that this will be added back in October.
Contrast those figures with the Bureaus of Labor Statistics (BLS) commissioner's speculation of a 230,000 hit to payrolls from the hurricanes. This figure reflected a BLS observation that the trend in payroll growth if we remove the hurricane-affected areas from the survey was in line with the trend of the past 12 months.
The figures appeared to be notably robust if we remove a reasonable estimate of the combined Boeing and Katrina impacts, given fears that soaring energy prices may have cut hiring growth outside the region.
The nonfarm payroll figures are consistently showing sizable upward revisions with each monthly report, and that can be regularly expected going forward. Typical revisions in recent months suggest that the September payroll drop may prove to be an increase once the BLS is done revising the figure.
The civilian employment survey has shown remarkable strength over the last seven months. The drop in September was only 17,000, following hefty gains of 373,000 in August and 438,000 in July. We expect a 245,000 average monthly gain for this measure during the 12 months of 2005, which exceeds what is likely to be a 190,000 average monthly gain in payrolls from the establishment survey.
The pop in the unemployment rate in September to 5.1% reflects only a temporary distortion from what is otherwise a downtrend in the figure through this recovery -- one that is mimicking the trend of the solid 1990s expansion years. And the year-over-year figures for hourly earnings growth are showing the same modest uptrend as seen in the 1990s -- at least since the unemployment rate has dropped below the 5.5% mark.
Although market commentators describe the jobs market in this cycle as "different," the only real difference seems to be a slower growth rate in the labor force that has been associated with lower trend-growth in job creation.
What does the September jobs report signal for other key data releases? For industrial production in September, we expect a 0.6% drop that will reflect the usual large distortion effect normally seen with hurricanes.
Yet a rebound in these figures should be evident in October and November, and we expect a fairly lean 2.6% growth clip for this series in the third quarter to be followed by a solid rate of 4% in the fourth and 6% in the following quarter.
For personal income in September, we expect a gain of 0.5%. Here the figures will be depressed modestly by Hurricane Rita. But the main distortion to growth, on net, will be upward, as the massive Katrina impact on rental income in August is unwound.
For GDP growth, the hours-worked data from the establishment survey reveal a 1.7% growth rate in the third quarter that is only modestly below the 2% to 2.8% trend of the past eight quarters, despite the hurricane distortion to September. Although we expect a further moderation in this rate to 1.5% in the fourth quarter as distortion effects play themselves out, we see this as consistent with our 3.3% GDP estimate in the third quarter and 3.7% forecast for the fourth.
Finally, the markets are still awaiting the negative impact on GDP growth that is likely from sustained strength in energy prices. But as we have previously argued, such strength in the past has largely been linked to gains in the U.S. economy rather than to future weakness.
Of course, Katrina reflects a supply rather than demand shock. But an important lesson of the past few years is that the consumer is remarkably resilient in the face of costlier energy, and we have seen little demand moderation despite higher prices over the last month.
In total, the September jobs report has removed a large source of potential pessimism from financial-market commentary through the month of October. Although September industrial production may have been hit by Katrina and Rita, the bulk of the negative hurricane news is likely behind us.
We now have major rebuilding effects -- and associated inflation risks -- in the pipeline. This provides a more bearish backdrop for the bond market and a more optimistic one for the overall economy.
Englund is chief economist for Action Economics