Jobs Report Could See 1-2-3 Punch

The September employment report could be hit with a triple shot from Hurricanes Marco, Laura and Sally, adding to the already slowing pace of gains seen over the last three months.

Hurricane Marco slammed into the Gulf Coast on August 24, followed swiftly by Hurricane Laura on August 27, both too late to be captured in the August employment report. These impacts should be seen in the September employment data to be released on Friday, as many areas were still recovering in mid-September.

These weather events were followed by Hurricane Sally on September 16, a bit late to see the full force in the September data, though some areas in Florida saw harsh weather preceding it in the survey week.

With so many already out of work or at least working remotely, the impact on payrolls may not be as severe as in normal times, but issues with Internet connections and supply deliveries could have an impact on hours worked.

The bigger impact on payrolls growth will be the diminishing effects of government stimulus. With no sign of further fiscal assistance this close to the election and COVID cases still running hot in some regions, it is reasonable to expect that payrolls growth will slow for the third straight month.

The leisure and hospitality sector remained a key factor for overall payrolls growth in August, rising by 174,000 after larger gains in the previous two months. There is no reason to believe that solid trend won’t continue in September even as COVID cases have climbed in some regions. In fact, the expiration of enhanced government unemployment benefits likely pushed some workers back into the job hunt.

The bigger issue for this sector is the approach of winter. No matter how many people can sit on outdoor patios, the Northern part of the US is likely to see a pullback in restaurant traffic as customers debate the choice of contracting COVID-19 inside or pneumonia outside.

Likewise, retail jobs have been a solid contributor to payrolls over the last three months, with widespread gains seen in August. This is likely to continue to a lesser extent in September, but after that the picture gets more uncertain.

As the holiday season approaches, it is doubtful the sector will embark on a seasonal hiring binge as it usually does. Seasonal factors, looking for that spike in October and November, will depress adjusted payrolls in the sector.

The government sector was also a strong component in July and August, boosted by hiring for the decennial census. When these workers are eventually released, it will have a downward pull on payrolls.

The unemployment rate slipped to 8.4% from 10.2%, the fourth straight decline, but more than twice the rate prior to the shutdowns. With workers returning to the labour force due to the expiration of benefits, it’s possible that the rate could tick back up temporarily.

Hourly earnings rose by 0.4% in August after a 0.1% increase in July, but the year/year rate steadied at 4.7%, well ahead of the rates seen before COVID. It will take a few more months for the year/year rate to decline, assuming that lower income workers are not laid off again.

Ahead of the Friday report, the ADP report will be released Wednesday morning. The report has underestimated private payrolls gains in each of the last three months, but will still be watched closely as a last input for payrolls forecasts.

Regional data point to further factory gains, services mixed

The regional data for September released to this point have been generally positive for the manufacturing sector, with all the readings above their breakeven points for a second straight month and most moving higher.

The ISM’s manufacturing measure rose to 56.0 in August from 54.2 in July and there are signs that the upward trend could continue with the September reading on Thursday, depending on the hurricane impacts in the affected regions.

The Empire State index rebounded solidly after falling in August and the Richmond Fed reading advanced for the third straight month. The Philadelphia Fed and Kansas City manufacturing readings ticked down slightly, but remained well in positive territory.

The remaining regional manufacturing data will come from the Dallas Fed on Monday and the Chicago PMI on Wednesday. The Dallas reading moved above its breakeven point in August, but the impact of the three hurricanes at the end of August and into September should be seen in the data.

The Chicago PMI, on the other hand, ticked down slightly in August and will be looking to remain at its breakeven point in September.

Markit will update its September manufacturing estimate earlier Wednesday morning. The flash reading showed an increase to 53.5 in September from 53.1 in August.

For services, the data already released have been mixed, Readings from the Philadelphia and Richmond Fed banks pointed to a further increase in the ISM’s services reading when it is released on October 5, but a sharp decline in the Kansas City Fed’s index and a small decline in the flash Markit estimate add some uncertainty.

The Dallas Fed will report its reading for services on Tuesday, and that index should also be impacted by the hurricanes that hit that region. The index rose sharply to 4.7 in August, just above the breakeven point.

Markit will update its September reading just before the ISM’s release. In the flash estimate, Markit said its services reading ticked down to 54.6 from 55.0.

Manufacturing and Nonmanufacturing Conditions
Sources as listed

Confidence shifting higher, but election/RGB possible spoiler

The University of Michigan reported a sharp increase in the preliminary measure of sentiment for September last week, with both the current conditions and expectations reading higher. While the index headline rose by 4.8 points to 78.9, that is still well below the 93.2 reading a year ago.

Expectations for the Conference Board’s confidence reading on Tuesday and the revision to the Michigan’s reading on Friday will look for improvements from August based on low gasoline prices and interest rates and signs that the job market continued to improve in the month.

However, the lingering concerns about COVID-19 flare-ups and the inability to pass new stimulus measures will be joined over the next few months by the increasing drumbeat of the election season.

The recent passing of Supreme Court Justice Ruth Bader Ginsberg, and the resulting battle over her replacement, will escalate political tensions at a time when consumers are trying to predict the outcome and timing of the election results.

Initial claims settle into tight range

The level of initial claims was virtually unchanged in the September 19 week, with the noise from seasonal adjustment issues now out of the mix. The impact of Hurricanes Laura and Sally had no real impact on the headline claims figure due to the overwhelming number of filers across the country, so it is unlikely that the much-weaker Tropical Storm Beta that hit this week will have a solid impact either.

While the level of initial claims should remain roughly steady, the four-week moving average could end its eight-week string of declines. Most recently, the average has benefitted from the higher levels before the seasonal adjustment factor change rolling out. The last of those weeks has finally left the calculation and the average should now be a more reliable indicator.

At the same time, continuing claims should remain on a downward trend due to a combination of displaced workers finding jobs and others seeing their benefits expire.

Income, spending both up in August, adding to Q3 rebound

The August income and spending data built on the gains seen in July, though the pace of growth likely slowed.

Non-farm payrolls again rose by over one million jobs in August, less than in the previous two months, but a larger 0.4% gain in hourly earnings and an uptick in the length of the average workweek will provide further support. As a result, wages and salaries should rise further in Thursday’s personal income release.

However, the continued decline in initial claims filings and the expiration of enhanced Federal benefits should further reduce the state unemployment payments category.

Return on assets should post a seventh straight decline in August, led by the continued low level of interest rates. Business dividends will be down again, as companies prepare for uncertainty surrounding the upcoming election, weather events and concerns about another wave of COVID-19 cases.

The “other” current transfer receipts category, which includes the direct stimulus payments to households, settled down in July after sharp declines in May and June that offset the April spike. With no new stimulus measures passed in August, this category should be roughly steady for the second straight month.

Proprietors’ income tracks the gains in retail sales, with solid gains in each of the last three months. Given the further increase in retail spending in August, the proprietors’ income category should rise as well.

The 0.6% increase in August retail sales was smaller than in July, even as motor vehicle sales rebounded.

Control group sales, which exclude motor vehicles, gasoline, building materials and food services, feed into the PCE measures. This category declined by 0.2% in August after a series of progressively smaller gains over the previous three months. As a result, PCE growth is likely to slow further this month, but should remain positive due to the motor vehicle increase.

Consumer prices posted another solid increase in August, according to the BLS’s CPI report, suggesting both overall and core PCE prices recorded a fourth straight gain.

With nominal PCE expected to rise further, real PCE should also increase, partially offset by the expected increase in the price index. Real PCE was up 36.6% at annual rate from the second quarter in July. A further increase in August will build on that strong start.

The final revision to second quarter GDP shouldn’t raise many eyebrows when it is released on Wednesday, with the 31.7% decline (-9.1% before annualization) in last month’s second estimate expected to be virtually unchanged – common for the final estimate of a quarter. Attention will be focused on the first estimate for the third quarter, due for release on October 29, just ahead of the general election.

Separately, from Extract Analytics, the look-ahead to the upcoming week’s stocks sees for the S&P that the short-term trend stays leaning to the next target zone of 3162 to 3100.

Kevin Kastner

Julie Ros
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Julie Ros

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