Economic Commentary: September 2018 Employment Report

By John Beuerlein, chief economist, Pohlad Companies

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The impact of Hurricane Florence is influencing several of the current economic reports and will likely continue to do so for the next few months. As a case in point, the Employment Report released on October 5 for the month of September indicated that payrolls increased by a mere 134,000 workers, some 50,000 lower than expected. The shortfall is being attributed to Florence. Revisions of +87,000 to the previous two months’ reports, however, more than compensated for the 50,000 shortfall. The unemployment rate fell to its lowest level since 1969 at 3.7%. The actual number of unemployed fell by 270,000 to 6.0 million. Over the past year, the number of unemployed persons has declined by 795,000. Average hourly wages increased by 0.3% in September and are now 2.8% higher than a year ago. When you couple the increased hourly wages with the increase of hours worked per week over the past year, the average weekly paycheck has increased 3.4%, the greatest year-over-year increase since 2007. This figure is most likely understating the wage increases of many workers due to the fact that many of the entrants into the labor force are 16-24 years of age and are entering at relatively low wage levels. It will be interesting to see if the impact of increasing wages is reflected in upcoming corporate reports of earnings and profit margins. As workers are becoming more expensive, business investment is increasing, resulting in improvements in productivity. This is noteworthy because there are only two ways to increase GDP: increase the size of the labor force or increase the output of the labor force (productivity). As expected, the Fed raised the upper bound on Fed Funds at their September meeting from 2.00% to 2.25%. Markets are currently assigning a 77% chance that the Fed will raise Fed Funds again in December to 2.50% given the ongoing strength in the overall economy. Longer-term interest rates have also been moving higher, and in the process, the yield curve has steepened over the past month. Specifically, the 10-year/2-year Treasury yield curve reached its tightest level this year on August 27 with a spread of 18 basis points (bps). Since then the 2-year yield has increased 21 bps to 2.88% while the 10-year yield has increased 38 bps to 3.23%, causing the curve to widen (steepen) to 35 bps. This steepening is due to expectations of continued economic growth accompanied by increasing inflationary pressures. As the threat of the yield curve inverting dissipates, the probability of a recession developing over the next 12-15 months is also reduced. The initial reading of 3Q-18 GDP will be released on October 26. Expectations are for the economy to have grown between 3.2% and 3.5%. If the actual numbers confirm these expectations, the economy will be on its way to the strongest calendar year of growth since 2005 with no imminent signs of a serious slowdown.