September 2019 August 2019 Survey Actual Prior Revised US Employees on Nonfarm Payroll 145k 136k 130k 168k Change in Private Payrolls 130k 114k 96k 122k Change in Manufacturing Payrolls 3k -2k 3k 2k US Unemployment Rate, Total 3.70% 3.50% 3.70% -- US Average Hourly Earnings, MoM 0.20% 0.00% 0.40% -- US Average Hourly Earnings, YoY 3.20% 2.90% 3.20% -- US Average Weekly Hours 34.4 34.4 34.4 34.4 -- US Labor Force Participation Rate 63.20% 63.20% 63.20% --
Nonfarm payroll employment rose by 136,000 in September, a bit less than expected by economists surveyed. However, revisions from prior months added 45,000 more jobs than had been previously measured. Ironically, August’s original report showed an increase of 130,000, much less than the anticipated 160,000. That number has since been revised up to 168,000.
Unemployment came in at 3.5%, the lowest level since I was in elementary school in 1969.
WHY DO I CARE?
This employment report closes the third quarter, and earnings season starts in a few days. It will be closely examined for clues as to the strength of the economy in the quarter and the resulting impact on earnings announcements. But remember, the report is a lagging indicator and gives us limited insight as to what lies ahead for the end of the year.
WAS THERE A BIG SURPRISE?
There were two surprises in the report. First, the 0.2% drop in the unemployment rate leaves the level at a 50-year low. Second, there was no change in hourly earnings for the month. This means that although more people are working than at any other time in five decades, there was no monthly increase in the price of labor. This implies an increase in supply, though the labor force participation rate was unchanged.
Over the last 50 years, from the time that baby-boomers entered the workforce to the time they began to leave, unemployment has vacillated between 5% and 7%, with several peaks during recessions. In 2015, the level dropped below 5%, and we have now reached a new recent low. We are clearly at full employment. At these levels, it is not unusual to see modest increases in the nonfarm payroll number simply because there are not that many more people to employ. However, it is curious to see softness in wages. The year-over-year change was the lowest since July last year and is not a welcome trend: It may imply that while jobs remain plentiful, the higher-paying job market is weakening.
Source: Bureau of Labor Statistics, Bloomberg, CataMetrics Management, LLC
The market is likely to welcome this news. The Federal Reserve may see the decline in the wage rate as further confirmation that a shift is warranted from raising the funds rate to lowering it.
The next employment report comes out on Friday, November 1, 2019.
HOW DOES THE GOVERNMENT GET THIS DATA?
Household Survey Data asks people if they are working, worked last month, are looking for work, etc. This forms the basis of the civilian labor force and the unemployment rate. If someone is not working and not looking for work, the survey does not consider them part of the labor force. If they want to work, (and are not in the military or in an institution such as prison), they are counted as part of the labor force. Dividing the number of people looking for and available for work but not working at the time of the survey by the number of people in the workforce gives the unemployment rate.
Taking those either looking for work or working and dividing it by the entire adult noninstitutional population (16 years and older) who are either employed or unemployed gives the Labor Force Participation Rate. The unemployment rate can go down by fewer people looking for work (decrease in the numerator) or more people working (increase in the denominator).
Establishment Survey Data is based on tax and withholdings filings. If you are paying
payroll taxes, you are on the Nonfarm Payroll list. Hours worked and hourly earnings
both come from this survey. It is considered more accurate (has a smaller margin
of error) because it looks at a much larger sample of people, but it does not include
self-employed people, who are not listed on payroll employment records (temporary
employees), agricultural workers and household workers.
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Erik Olsen is Co-Founder and Managing Partner of CataMetrics Management, LLC. Catametrics provides portfolio-construction methodologies, strategic marketing and investment-management expertise to investment advisers and their clients.
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