Jobs: Slammed by Gustav, Ike, and Boeing
Hurricanes Gustav and Ike, as well as the Boeing (BA) strike, will conspire with an already-deteriorating labor market to depress U.S. payrolls in the September employment report, scheduled for release on Oct. 3, raising the risk of an outsize drop in jobs for the month. We also expect a further rise in the unemployment rate to 6.2% from 6.1%, given expected payroll weakness, a deteriorating trend in weekly initial jobless claims, and a falling labor market reading in the last consumer confidence report.
We expect payrolls to fall by 100,000 in September, with a drop that may exceed the 101,000 June decline to mark the biggest pullback in payrolls since March 2003, when hiring paused with the uncertainty at the onset of the War in Iraq.
The expected 6.2% unemployment rate would mark the highest level since June 2003. The average workweek should hold at 33.7 hours, and average hourly earnings should rise 0.3%, to leave year-over-year hourly earnings growth a tick below the 3.6% rate posted in August.
Looking at the data we normally use to derive out forecast, the September ADP Employment survey, released on Oct. 1, revealed a notably small 8,000 drop in private-sector employment.
The weekly initial jobless claims data and continuing claims figures have clearly shown a notable hurricane distortion over the past couple of weeks, with the Bureau of Labor Statistics indicating that initial claims for the week of Sept. 20 were boosted by about 50,000 because of Hurricane Gustav. The data suggest that the hurricanes have been disruptive to the labor market, although the key question remains to what degree these hurricane disruptions will be captured by the September employment report.
The Michigan Consumer Sentiment survey and the Conference Board survey have both bounced through September, with gas prices notably subsiding in August and early-September following the spectacular run-up through the first half of the year. In June, the Michigan survey fell to the lowest level since May 1980, while the Conference Board survey dropped in June to the lowest level since March 1992. The bounce since then, led by the expectations component, still leaves these series at historically depressed levels that have only been seen previously in recessions. The current component, which tends to be more driven by labor market activity, has remained weak. These figures are still consistent with labor market weakness.
And of particular note, the labor market differential from the consumer confidence report has trended steadily lower with the rise in the jobless rate, and this measure fell further to -20.6% in September, down from -18.2% in August.
The employment components from the various factory sentiment surveys continue to generally be consistent with continuing job attrition in the manufacturing sector, though with little evidence of a weakening in September and perhaps evidence on net of a modest bounce.
But our September forecast also factors in some special distortions:
Boeing Strike: On Sept. 6, 27,000 machinist union workers went on strike. Our guess is that all of these workers will be subtracted from the payroll report, with risk of an additional 8,000 temporary layoffs in related companies. This would leave an overall Boeing strike impact of 35,000.
Hurricanes: Gustav made landfall on Sept. 4. The more damaging Hurricane Ike landed on Sept. 13. While payrolls and the household employment measure typically show little impact from hurricanes, it should be noted that Hurricane Katrina had a huge impact in September 2005, when the BLS initially estimated that the storm subtracted 230,000 from payrolls. The household employment measure also notably fell that month, although the volatility in the series makes it difficult to read much into any monthly swing. With Katrina, the industries that revealed the biggest payroll hit relative to trend were: Trade/Transportation & Utilities, Retail Sales, Leisure & Hospitality, and Government.
We expect a -20,000 impact on September payrolls from the hurricanes, although there is risk of a larger decline given the similar Katrina-Rita experience.
Economic/Financial Market Uncertainty
Employment reports sometimes show pause in periods of heightened economic and financial uncertainty, though such reactions are uncommon in the absence of a direct link to job creation or associated commodity market disruptions that prompt immediate "real" effects. Although there is a risk of labor market dislocation from this month's remarkable financial news, a big impact probably isn't likely.
Payroll growth defied expectations of large declines with the advent of financial market turmoil last August, September, and October, with monthly gains of 74,000, 81,000, and 140,000, respectively, that averaged 98,000, which is almost identical to the 100,000 average payroll gain through the first seven months of that year.
Payroll effects are more evident with shocks that include physical disruptions that have immediate "real" effects. Payrolls dropped an average of 185,000 in February and March of 2003, in the lead-up to the invasion of Iraq, vs. average monthly job growth of -2,000 over the previous six months. Yet, these declines largely reflected disruptions from soaring commodity prices stemming from fear of an impending supply-shock, which clearly depressed first-quarter inflation-adjusted spending and gross domestic product. The events of September 11 left an average monthly payroll decline of -285,000 in August and September 2001, from a -128,000 average monthly decline in the six months prior, though these declines also reflected physical disruptions and reduced air travel in the aftermath of the attacks that directly reduced real activity.
Current market turmoil and recent bailout negotiations have more in common with prior dislocations that have boosted uncertainty but with no immediate disruption to prices or production. As such, the hurricanes and Boeing strike should have larger observable payroll effects this month than financial market turmoil, though this later disruption raises downside risk for Friday's report.
Finally, the figures will be reviewed from the standpoint of what it will mean to the Fed, where officials are still balancing an overshoot in inflation alongside a weakening economy, and where there may be growing reluctance to use rate cuts again as a tool to address disruptions in global financial markets.