The latest monthly report on the employment situation in the US saw the unemployment rate dip to its lowest level since 1969. While the addition to non-farm payrolls was below expectations, upward revisions to prior months made this a very bullish report. The numbers will add to the Fed’s confidence that it can raise interest rates more aggressively without it’s having a negative impact on the US economy.
The Numbers
Here are several of the September report’s highlights that are positive, some taken verbatim from the report itself:
- The unemployment rate is now 3.7% versus 3.9% a month ago.
- Nonfarm payroll employment increased by +134,000 in September.
- August nonfarm payroll employment gains were revised up from +201,000 to +270,000.
- July nonfarm payroll employment gains were revised up from from +147,000 to +165,000.
- Total payroll gains in this report versus the last report were +221,000
- The number of unemployed persons decreased -270,000 to 6.0 million.
- In September, the labor force participation rate remained at 62.7 percent, and the employment-population ratio, at 60.4 percent.
- The household survey shows a huge gain for employment of +420,000.
- Over the past year, manufacturing has added +278,000 jobs.
- In September, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $27.24. Over the year, average hourly earnings have increased by 73 cents, or 2.8 percent
Negatives:
- The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 263,000 to 4.6 million in September.
- The U-6 rate of unemployment that includes marginally attached workers and involuntary part-time employees rose from 7.4% to 7.5%.
The Fed’s reaction function
Ignore the highlights in yellow. And notice the column on unemployment in this March 2018 summary of economic projections from the Fed. It shows a Fed whose policy guidance was predicated on unemployment rates going down to 3.9 or 3.8% by the end of 2018 and then declining to 3.6% at most by the end of 2017. Inflation, highlighted in yellow was to be marginally above target at most.
All of this is out the window. As I have been saying for months now, the unemployment rates in the Fed’s summary are not credible in the context of an economy growing at 2.5 or 3%. And because we are now growing above 3%, they are even less credible. Incongruously, the last Fed unemployment projection for the end of this year rose modestly from 3.6% to today’s 3.7% level.
What this has meant in 2018 is four hikes instead of three. And it likely means 4 hikes in 2019 instead of the three now projected by the Fed. The market is not prepared for this.
Possible market impact
In an economy growing above expectations with unemployment falling below expectations, Fed hikes shouldn’t be a problem for equities. Any loss of multiple expansion due to a rising discount rate will be made up for by higher earnings due to greater consumption. So I wouldn’t worry about the Fed’s hikes impact on equity markets.
On the other hand, as I have been saying, we are seeing a bear steepening in bond markets. And this means that holders of duration are going to feel the most pain over the coming months unless economic jitters return. At the same time, it’s not clear to me when Fed hikes will hit credit spreads because the economy is still growing robustly. It’s conceivable that spreads will remain tight in early 2019 before they widen later in the year as the Fed’s hikes begin to take their toll. That would be my base case for now.
Overall, though, the numbers are bullish. They support a more bullish outlook on the US economy. And over the near-term that also supports asset prices.