US: Hurricanes Harvey and Irma blow payrolls off course – Wells Fargo

Analysts at Wells Fargo explains that US employment contracted for the first time in seven years last month as Hurricanes Harvey and Irma disrupted work and typical hiring.

Key Quotes

“Nonfarm payrolls contracted by 33,000 jobs in September, led by a 111,000 decline in the leisure & hospitality sector. Average hourly earnings rose a stronger-than-expected 0.5 percent, but the average wage last month was flattened by the drop in the low-paying leisure & hospitality industry.” 

“Roughly 1.5 million people reported that they were unable to work during the survey reference period, which was the week that Hurricane Irma hit Florida. Yet paradoxically, the number of people defined as employed last month jumped by 906,000. That was the biggest one-month increase since 2013 and more than four times the average over the past year. Even with an increase in labor force participation, that pushed the unemployment rate down to 4.2 percent.” 

“The household survey can be even more volatile than the payroll survey given its small sample size (about 60,000 households) so monthly readings can exaggerate the trend. Given that September conditions were particularly atypical, we have a hard time taking the drop in the unemployment rate and rise in participation at face value this month.” 

“The manufacturing sector looks to have been relatively unshaken by the recent storms. Factory orders for August rose 1.2 percent in August amid strong demand for durable goods. Nondefense capital goods order ex-aircraft are now up 7.2 percent on a three-month average annualized basis and point to solid equipment spending in the months ahead.” 

“The timelier ISM manufacturing index suggests the positive momentum carried into September. At 60.8, the index rose to its highest level since 2004. Some of the headline’s gain was attributable to longer supplier delivery times—usually a sign of growing demand at suppliers, but in the most recent month lengthened by supply chain disruptions. Nevertheless, supplier delivery times have been lengthening since the start of the year and look to have encouraged more hiring. The employment index rose to a six-year high and is consistent with manufacturing payrolls having risen by an average of 9,700 since July.”

“Production looks set to remain strong with the new orders index coming in above 64. We suspect the auto sector is providing some temporary support as Harvey and Irma have generated the need to replace vehicles. Auto sales jumped to an annualized rate of 18.5 million units from a two-and-a-half year low in August.”   

“While the manufacturing sector has shifted into a higher gear this year, construction activity has slowed. The o.5 percent rise in August construction outlays came on the heels of a 1.2 percent pullback, which was twice as steep as what was initially reported. Elsewhere outside the manufacturing sector, however, activity continues to expand. The ISM non-manufacturing index leapt to a new cycle in September. The pickup was supported by rising current activity, new orders and employment, but also longer supplier delivery times.”