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Florence Muddies View of September Employment

RFP
Payroll employment dropped to a level of 134,000 in September after being revised up for the months of August and July. Much of the apparent weakness can be attributed to delays in reporting by companies located in the Carolinas, which were temporarily shuttered in the wake of Hurricane Florence. Evacuations started the week that the employment survey was taken for the month. Most of the underreported workers should show up again in the October data when revisions for September are released.

The current report showed continued strength in professional services; that includes a lot of new college graduates. The trend continued in that sector with full-time hires, including benefits, significantly outpacing temporary hires. Benefits had been stripped during the financial crisis but are now being leveraged as a selling point to attract permanent hires.

Strong gains were also seen in health care, transportation and warehousing. The move in retail jobs to online and delivery continued as hiring of couriers picked up. Manufacturing and construction employment remained on an upward trend. One of the biggest hurdles to repairing and rebuilding in the wake of Hurricane Florence will be an intensified shortage of workers. Builders were already complaining of labor shortages; now tariffs are also pushing up materials costs.

The sectors hit hardest by Florence in September were leisure and hospitality and retail. Together, the two sectors shed 37,000 jobs during the month, much of which will be recouped either with revisions or in the data for October. Consumer spending during September could also show disruptions in the worst affected areas with the focus shifted to buying supplies and building materials. The rebuilding efforts are expected to be muted compared to other storms because much of the damage was due to flooding as opposed to wind. Flood insurance has become extremely pricey in recent years. Parts of Houston remain devastated, one year after Hurricane Harvey hit because many homeowners could not afford to rebuild. Federal spending on flood damages is also limited, relative to past disasters.

Average hourly earnings ticked up 8 cents an hour, but slowed to a 2.8% year-over-year pace. Distortions to the data created by Florence could have dampened overall gains in wages for the month. Many plants have been reporting more overtime as bottlenecks are forming along with worker shortages. That should show up as an uptick to hours worked and overall earnings next month.

The largest effects from Florence should have shown up in hours worked, which held steady during September despite losses due to the hurricane. That means we should see a bounce-back in the October report. The number who could not work during the survey week was nearly 300,000. The number of workers whose hours dropped below 35 hours for the week topped 1.3 million. Those figures are elevated relative to recent months but still a small fraction of the magnitude of those displaced by weather during the back-to-back hurricanes of 2017.

Separately, the unemployment rate dipped to 3.7%, the lowest pace since the height of the Vietnam War in the late 1960s. Again, Florence may have temporarily lowered the read on the unemployment rate for the month. The participation rate held steady, but the actual number of people not in the labor force ticked up a bit.

The one place we have yet to see the improvement we would like for the unemployed is for those who have been unemployed for more than 27 weeks; those workers actually rose slightly during the month. Many employers are complaining about the erosion to skills among those who have been unemployed for a very long time. We also know that the long-term unemployed suffer more mental and physical health problems. This a wound that has yet to heal from the crisis and sluggish recovery than followed.

Bottom Line
Flood waters from Hurricane Florence have muddied the read on employment for September, but not the near-term outlook for the labor market. Worker shortages are expected to increase along with upward pressure on compensation. Benefits are finally coming back after being cut dramatically; benefits are worth more than wage gains for some workers. That said, nobody is turning down a raise. We have passed the point at which wages should be accelerating more rapidly.

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