October 6, 2017— The employment report for September reflected continued underlying strength in the U.S. labor market, but also a significant impact from the multiple hurricanes that month. On balance, we are encouraged by the continued strength, and especially by the return of stronger wage growth that is supportive of our positioning. Next month, we expect to see a reversal of some of these storm impacts.

Headline job losses of 33,000 were a result of the storms in our view. There was a slowdown across many goods and service sectors which still managed to add jobs, but the biggest impact was a massive loss of 111,000 jobs in the leisure and hospitality sector, which includes restaurant workers, hotels and the like. The overall month-over-month decline in jobs ended an 83-month streak of job gains that started in October of 2010, but does not change our view of the underlying strength of the labor market. Hurricane Harvey decimated much of Houston, and Irma did the same in many parts of Florida. The methodology of the jobs report does not actually reflect whether someone has “lost” their job; it reflects whether someone was paid during the so-called reference week, which falls in the middle of each month. The job losses in this month’s report mostly reflect people who were unable to report for work in storm-affected areas or employers who were unable to operate. This explanation is consistent with the sharp spike in people filing for unemployment claims following the storms. We expect job growth will bounce back significantly in the next report.

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Source: Bureau of Labor Statistics, data as of September 30, 2017

An encouraging signal in the report was the decline in the unemployment rate to just 4.2%. That is slightly lower than was ever registered in the previous cycle, and the lowest since 2001 as pictured above. The higher “U6” measure of unemployment which accounts for people who are only able to find part-time work or have stopped looking, also fell to a multiyear low, hitting 8.3% for the first time during this recovery.

The most important signal in the report was the return of stronger wage growth, in the chart below. After accelerating throughout 2015-2016, wage growth was decelerating for much of this year until the last few months. In this most recent report, the year-over-year gain in average hourly earnings hit 2.9%, a post-recession high. We have been expecting the reacceleration of wage growth based on the very low unemployment rate, so this is a welcome sign. We should caution, though, that some of the outsized gain in the September report is due to the hurricane impacts. This is because the sharp job losses described above in leisure and hospitality were in the lowest paid sector of the economy. Removing lower paid workers would push up the average, on the margin. This is not to say that the acceleration in wages is entirely due to this math, but we would not be surprised if wage growth is tempered a bit next month as those restaurant workers are put back in.

Overall, the market impact is as would be expected. A lower unemployment rate and higher wages are pushing up inflation expectations in the market, which had already been moving up since a recent low in June. This should continue to push up on longer-term bond yields as well as expectations of Fed rate hikes and the dollar.

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Source: Bureau of Labor Statistics, data as of September 30, 2017

Core narrative

The jobs report is supportive of our expectation of continued growth in the domestic economy. The labor market remains strong but job gains were hampered by the hurricanes last month. Most important is the recovery of wage growth, which we believe will play into stronger inflation going forward leading to more interest rate hikes from the Fed and higher interest rates across the yield curve. All of this is supportive of our underweight to core fixed income.

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