full employment

KEY DATA: Payrolls: 156,000; Private: 167,000; Unemployment Rate: 5% (up 0.1 percentage point)

IN A NUTSHELL: “A lack of qualified applicants is limiting hiring while growing job openings are bringing people back into the market, all signs of a labor market near full employment”

WHAT IT MEANS: If Fed members were hoping for a strong September jobs number, they didn’t get it. Yet the employment report neither put the kibosh on a December rate hike nor provided cover for one. Payrolls increased a little less than expected, but the private sector hired people at a solid pace. It was the government that restrained job growth. Remember, a job is a job, no matter who does the hiring. As for the details, manufacturers continue to slice payrolls. Despite near record sales, the vehicle sector downsized. There was also the usual oddity. This time, it was a huge 14,000-worker reduction in the transit and ground transportation sector. Did someone go out of business while I was not looking? Back that out and the number comes in right at expectations. Indeed, there were few other surprises as just about every other sector added workers at a reasonable pace. Hiring may not have boomed but wages and hours worked were up solidly, implying that personal income was up strongly.

As for the tick up in the unemployment rate, it was more a rounding issue than an increase. The rate was 4.92% in August and 4.96% in September. That is well within the margin of error. But more importantly, there was a large rise in the labor force, which led to an increase in the participation rate. That is expected at this point in the cycle. Indeed, I commented yesterday that a tick up in the rate shouldn’t be a surprise if the labor force surged.

The so-called “real” unemployment rate, the U-6, stayed at 9.7%. But let me say once again, this is a meaningless number. It includes people who want full-time jobs but can only get part-time jobs. The problem is that businesses have shifted hiring strategies and now prefer more part-timers than in the past. People might want to work full-time, but if businesses don’t want full-timers, there is nothing workers can do. This is a structural shift and comparing today’s U-6 rate with those of the past is pointless. It is not the economy that has caused the rate to be high, but business hiring decisions. So, either blame businesses for profit maximizing by hiring more part-timers or dump the number. I say just dump the number.

MARKETS AND FED POLICY IMPLICATIONS: I am sure this report will be spun in so many ways that we will all be dizzy by day’s end. My take is simple: The lack of available workers is limiting the ability of firms to hire. It is not that they don’t want to, it is that they cannot find qualified workers at wages they are willing to pay. Thus, moderate job gains are likely to persist and are not a sign of economic weakness but are a sign of a tight labor market. Expect to see the unemployment rate bounce around, but slowly decline. This is also a normal pattern. Most economists thought this would happen a year or even two years ago, but that pattern was delayed. When job openings are high and the amount of “excess” or readily available labor is low, people who have given up come back into the market. That is happening now and is slowing the decline in the unemployment rate. As for the Fed, this report neither screams “hike” nor forces the FOMC to punt again. With the members leaning toward a hike this year, even mediocre reports like this one are still good enough to allow for a rate hike in December. That is what I expect.