The September payrolls gain of 148k was disappointing – market expectations were for a gain of 180k. Revisions didn’t add much this month with August revised up 24k but July revised down 15k. The unemployment rate dropped to 7.2% over the month and for once occurred for all the right reasons – the household survey showed a gain in employment, a decline in the number of people unemployed and a flat participation rate.
Looking at the sectoral breakdown,
construction posted a solid gain of 20k in the month. The downside surprises came in manufacturing
where employment was flat and there was an only soft gain in private services
of 100k. There was a gain of 22k in the
Government sector, all coming from state and local government where the process
of fiscal adjustment is further advanced than at the federal level.
This result shows labour market strength
remained only modest leading into the Government shutdown. It’s hard to imagine a stronger result in
October given the disruption to activity and the likely delay to private sector
hiring decisions given the uncertainty of the fiscal impasse.
While we think the direct impact of the
shutdown on economic activity will likely prove to be limited, it remains to be
seen what the impact will be on consumer and business confidence, especially in
light of the fact we will be doing this all again next year. I’m not convinced the Tea Party faction of
the Republican Party will capitulate readily, although I’d be very happy
wrong on that point. The first important
date is the December 13th deadline for a House and Senate budget
conference committee to end negotiations on a Budget resolution. I don’t have high hopes for that process
meaning we will head into the New Year with spending authority needing to be
renewed by January 15th to avoid another government shutdown. And of course the
debt ceiling will need to be raised by (or shortly after) February 7th.
A December tapering decision by the Fed
seems increasingly unlikely. It became
clear from their September deliberations that any decision to taper their asset
purchase program would be data dependent rather than any other agenda. They just won’t have enough by way of “clean”
data to make a call this side of Christmas.
A March tapering decision looks increasingly likely.