October Jobs Report Preview

Look for Lingering Distortions

Our forecast for nonfarm payroll employment in October shows a rise of 180,000 following a weaker number in September, when flooding associated with Hurricane Florence kept many workers at home. Hurricane Michael, which hit the Florida Panhandle during the household survey week this month was smaller, but devastating to the communities it hit. There is a high probability we could see upward revisions to September as firms unable to report payrolls due to flooding have had time to record jobs that might have been disrupted but not destroyed.

Hurricanes Harvey and Irma a year ago are likely to play a role in our reading of the monthly data. Hurricane Irma caused a temporary drop in average hourly earnings for October 2017. In response, the year-on-year comparison will not need much of an increase for wages to appear as though they are accelerating. We expect to see a 0.2% rise in average hourly earnings for the month. Pending revisions to September, that would mark a 3.1% jump in the pace of earnings growth on a year-over-year basis, a sharp acceleration that could further spook financial market participants who fear additional rate hikes by the Federal Reserve.

The threat of tariffs raises another hurdle to sustaining wage gains. Tariffs are already squeezing profit margins and could rise dramatically at the start of 2019. That would be just as the cushion of tax cuts for businesses wears thin. Tax cuts boosted profits dramatically in 2018 but will make year-over-year comparisons difficult starting in 2019.

We expect to see the unemployment rate hold steady at 3.7% and finish the year at 3.6%. It is already at a 49-year low; the 3.6% level hasn’t been seen in almost 52 years. An expected increase in inflation tied to tariffs in 2019 threatens to offset wage gains associated with exceedingly low unemployment.

The largest driver of individual income gains has been an increase in the number of hours worked as opposed to a rise in real wages. This is good news but still worrisome. Too many households (nearly 40%) are living paycheck to paycheck and struggling to recoup what they lost to the financial crisis. A majority of Americans remains concerned that living standards will not improve in the years to come. That is unprecedented given the low level of unemployment composition of jobs and wage gains just aren’t measuring up the the past.

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