Just 12,000 jobs: what storms and strikes hide

Non-farm payrolls rose by just 12,000 in October. A casual reader might have taken that as a sign the economy was falling off a cliff. Markets shrugged, correctly treating the figure as a statistical distortion.

The rest of the report told a calmer story. The unemployment rate, which comes from a separate survey of households, held at 4.1 per cent. Average hourly earnings kept growing at a steady pace. If employers had really stopped hiring, the jobless rate would have been the first place to show it.

Storms and a strike

Two hurricanes, Helene and Milton, hit the data, as did the continuing strike by 33,000 workers at Boeing. The Bureau of Labor Statistics said response rates and manufacturing employment had both been pushed down by these one-off shocks. Underlying demand for workers in the private sector still looks solid, and the headline number should bounce back once the disruption fades.

How a strike leaves the count

The mechanics explain most of the gap. The payroll survey asks employers how many people they paid during the pay period that includes the 12th of the month. Boeing's machinists walked out in mid-September and were still on the picket line in October, so they drew no pay and dropped out of the count. The household survey treats the same workers differently, counting them as employed but absent from work, which is one reason the unemployment rate did not move. The same workers will reappear in the payroll figures as soon as they return.

The storms did their damage through timing. Milton made landfall in Florida during the week of the survey's reference period, and Helene had torn through the south-east shortly before. People who could not work because their workplace was shut, and were not paid for the period, fell out of the count. Businesses in the affected areas were also less likely to return the survey at all. The bureau said the initial response rate was well below normal, which means the first estimate rests on a thinner sample than usual and is more likely to be revised.

Revisions matter more

The more awkward news was in the back months. Estimates for August and September were revised down by a combined 112,000, which pulls the recent trend in hiring lower than markets had assumed. Those revisions are not easily blamed on the weather, since they cover months largely before the storms. Taken together with the October figure, they suggest the labour market is cooling gradually, as it has been for most of this year, even if it is not collapsing.

The composition of October's gain was lopsided. Government and health care accounted for most of the jobs added, while private employers as a whole cut staff on the month. Part of that private decline is the strike and the storms, since manufacturing, leisure and hospitality are the sectors most exposed to both. Part of it reflects a longer trend: hiring outside health care and the public sector has been soft for much of the year, and the October data do nothing to contradict it.

Other gauges support that reading. Weekly claims for unemployment benefit remain low by historical standards, and layoff announcements have not surged. Job openings have fallen from their peak, and workers are quitting less often, a sign they feel less confident of finding something better. That is the profile of an economy settling into slower hiring, not one shedding workers.

This has happened before

Storms have fooled the payroll figures before. In September 2017, after hurricanes Harvey and Irma struck Texas and Florida, the first estimate showed employment falling for the first time in seven years. Payrolls rebounded strongly the following month as displaced workers went back to their jobs. The episode is a fair guide to what should happen now, with one difference: the labour market in 2017 was tightening, while today it is gently loosening, so the rebound may be less dramatic.

Strikes leave a similar footprint. When large groups of workers walk out, such as the car-industry strikes of last autumn, payrolls dip by roughly the number on strike and recover once a settlement is reached. The Boeing machinists are due to vote on an improved contract offer early next week. A deal would add the strikers back to payrolls in the following report.

What the Fed will make of it

The timing could hardly be worse for anyone trying to read the economy. The presidential election is on Tuesday, and the Federal Reserve announces its next decision on Thursday. Futures markets expect a quarter-point cut, and nothing in this report is likely to change that. Officials will look through the storm-hit headline, as they have said they would, and give more weight to the unemployment rate, wage growth and the revisions.

The risk for the Fed runs both ways. If the downward revisions are the start of a pattern, it may be cutting too slowly. If the November report shows a big rebound, as it should, investors who read the October figure as a signal of weakness will have to reprice the path of rates again. That tension is why bond yields barely moved on the release.

The report's timing also guaranteed that it would be argued over. Published four days before a presidential election, the headline figure became a campaign talking point within minutes. Traders gave it far less weight than the politicians did. Futures prices for the Fed's December meeting barely shifted, and the two-year Treasury yield, the most sensitive to expectations for policy, ended the day higher, a sign that investors saw nothing in the numbers to justify faster cuts.

October's 12,000 figure says more about weather and a picket line at Boeing than about the economy. Expect a sharp rebound in the next report or two, and do not expect the Fed to read much into this one. The number to watch is the unemployment rate: if it stays near 4.1 per cent through the winter, the Fed will keep cutting at a measured pace rather than in a hurry.