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OCTOBER 9, 2017 —  JOBS SWEPT AWAY BY HURRICANES; HUGE DATA DISTORTIONS

September data has been distorted by the impact of the hurricanes that hit the continental US.  New payrolls decreased significantly last month, while average hourly earnings surged.  The unemployment rate unexpectedly dropped to 4.2 percent from 4.4 percent the month before.  It is difficult to assess exactly how much of an impact the hurricanes had and how much is due to the state of the underlying economy. The data distortions are expected to continue through October as rebuilding after the storms begins.  A true assessment of the economy may not be evident well into November.

September payrolls fell by 33,000 jobs, weaker than the expectation for a 88,000 increase.  August data was revised to show an increase of 169,000 (up from 156,000).  The Q3 average of 91,000 is less than half the Q2 average of 187,000, and weaker than the 12-month average of 148,000 new jobs.

Utility worker overtime pay is the likely source of some the 0.5 percent increase in average hourly wages. It is hard to separate out a temporary increase from the pressure of a labor market near full-employment. Hourly wages are up an annualized 2.9 percent, suggesting a long anticipated revival of inflation.

The 0.2 percent decline in unemployment is partly related to hurricane disruptions, but the labor market may be tightening.  Employed persons rose by 906,000, while the number of unemployed fell by 331,000 in September.

Three Fed Presidents commented on the September data.  Bullard (St. Louis) is concerned about the negative numbers and fears the FOMC may make a policy mistake.  Kaplan (Dallas) is undecided on the next rate move, noting the US economy is solid and inflation pressures are building.  He is looking for more evidence before making a decision.  Bostic (Atlanta) said the strength in the economy makes him comfortable with raising rates in December; the September payrolls were a one-off due to the hurricanes.

Policy makers will not have a clear view of underlying labor market momentum in the lead-in to their December meeting; this, in conjunction with balance-sheet normalization, will not make it easy to assess whether the economy can handle a year-end interest rate hike.  Both caps and swaps will serve you now to lock into low rates available today, if you believe another rate hike is imminent.