Unemployment Falls, Though Job Growth Disappoints in September

Key Takeaways:

• Nonfarm payroll employment rose 194,000 in September, according to the Bureau of Labor Statistics. Job growth in the prior two months was revised upward by 169,000. Leisure and hospitality employment rose by 74,000, manufacturing employment increased by 26,000, and retail trade jumped by 56,000. However, employment in state/local government educational services fell by a combined 161,000. Employment in private educational services also fell by about 19,000. Residential construction employment (including specialty trade contractors) rose by 3,400. From a year ago, average hourly earnings grew 4.6 percent, an acceleration of six-tenths from the prior month. According to the household survey, the unemployment rate fell four-tenths to 4.8 percent, the lowest level since March 2020. However, the labor force participation rate also ticked down one-tenth to 61.6 percent. The household survey measure of civilian employment rose by 526,000.
• The ISM Service Index ticked up two-tenths to 61.9 in September. Any reading above 50 indicates expansion. The gain in the headline index was driven by a 2.2-point gain in the business activity index, which rose to 62.3. The employment index fell seven-tenths to 53.0 – though of the last nine months, this was the eighth time it was above the expansionary threshold. The supplier deliveries index declined eight-tenths to 68.8, only a few points below its 2021 peak of 72.0 in July. The prices paid index increased 2.1 points to 77.5.
• Light vehicle sales fell 6.1 percent in September to a seasonally adjusted annualized rate (SAAR) of 12.4 million, the lowest level since May 2020 and the fifth straight monthly decline, according to Autodata.
• Consumer (non-mortgage) credit outstanding increased $14.4 billion in August, according to the Federal Reserve Board. Revolving credit (largely credit cards) rose around $3.0 billion to the highest level since April 2020, though remains 8.7 percent below the February 2020 peak. Non-revolving credit (largely auto and student loans) increased by approximately $11.4 billion.
• Factory orders grew 1.2 percent in August, while July was revised upward by three-tenths to a 0.7 percent increase, marking the 15th monthly increase over the past 16 months, according to the Census Bureau. However, excluding transportation, factory orders were up 0.5 percent, the weakest monthly growth rate since February. Core capital goods orders were revised upward one-tenth to 0.6 percent growth from the advanced estimate. Nondurable goods orders also rose 0.6 percent, as did inventories of all manufactured goods, the thirteenth straight monthly increase of inventories. Shipments of factory goods rose just 0.1 percent.
• The real goods U.S. trade deficit widened by $1.95 billion in August to $101.8 billion, according to the Census Bureau. Real exports grew 0.5 percent and real imports rose 1.1 percent.

Forecast Impact:

This morning’s jobs report from the Bureau of Labor Statistics painted a mixed picture of the ongoing labor market recovery. Total nonfarm payroll employment rose by 194,000 in September, down from August’s upwardly revised pace of 366,000. However, in our view the continuing abnormal seasonal pattern of hiring in the education sector meant this report was somewhat better than it may have first appeared. Hiring in these sectors, while positive on a non-seasonally adjusted basis, was much lower than would be expected for September, resulting in seasonally adjusted job losses. This abnormal seasonal pattern has been distorting the overall job growth picture for several months. The rise in the ISM Services Index highlights the continual expansion of the service industry, supported by increases in retail trade, leisure hospitality, and professional and business services employment, as consumer activity continues to return, though the increase in the prices paid index also highlights that the service sector continues to face pricing pressures. Businesses are also facing increased wage pressures, as firms continue to try to attract workers, a trend which will likely need to continue in order to see the labor-force participation rate rise back toward its pre-pandemic level.

Federal Reserve Chairman Powell said at his most recent press conference that a good employment report was all that was needed to begin tapering. Though this report was probably weaker than they would have preferred, certain aspects of the report were likely healthy enough that we believe the Fed will likely announce the onset of the tapering of their asset purchases at the November meeting.

The increase in service sector activity as measured by the ISM Services Index is somewhat positive for consumer spending in the third quarter, as is the rise in revolving credit outstanding. However, offsetting the positivity was the further decline in September light vehicle sales, as a lack of semiconductors continues to weigh on the inventory of autos available for sale. Given ongoing issues with auto production, we will likely need to downgrade our outlook for consumer spending for the remainder of the year, and thus our outlook for overall economic growth. The widening of the trade deficit in August will also likely lead to lower growth in the third quarter. While spending has shifted somewhat back toward services as the economy reopens, labor scarcity in the service industry, as well as ongoing COVID concerns, has dampened the pace of recovery in the service sector. This has helped maintain heightened demand for goods, which also weighs on net exports, and thus GDP.

Nathaniel Drake
Economic and Strategic Research Group
October 8, 2021

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