Submitted by Joseph Carson, Former Director of Global Economic Research, Alliance Bernstein
In September, payroll employment rose close to consensus estimates and the jobless rate dropped to a 50-year low, easing fears, at least for the moment, of a broad slump in hiring and a deep economic slowdown.
Yet, the employment headlines are misleading. The underlying details on payrolls show there is in fact a hiring slump underway, consistent with the results from recent business surveys of manufacturing and service sectors. Q3 GDP growth will be the weakest since 2015, putting downward pressure on corporate earnings.
According to the Bureau of Labor Statistics (BLS), payroll employment rose 136,000 in September, and with upward revisions to prior months payroll employment in Q3 averaged 157,000 a month, roughly matching the 152,000 gain of the prior quarter. On the surface, employment conditions look be on a steady course, and unchanged over the past several months.
However, the payrolls of nonproduction and supervisory workers, which represents the bulk of the private sector workforce accounting for over 80% of the private payroll gains in the current economic cycle dating back to 2009, paints a much weaker picture of labor market conditions.
In Q3, payrolls of production and non-supervisory workers showed an average monthly gain of 71,000 (less than half the overall payroll gain), well below the subpar average monthly gain of 98,000 in Q2, and represent the smallest quarterly gain since 2010.
Equally important is the fact that the payrolls of production and non-supervisory workers in mining, manufacturing, retail trade, utilities, leisure and hospitality showed an outright decline in Q3. And the payrolls of production and non-supervisory workers in manufacturing and retail trade also posted a decline in Q2. The last time the payrolls of production workers in manufacturing and non-supervisory workers in retail trade declined for two consecutive quarters at the same time was 2009, during the Great Financial Recession.
The big puzzle in the September employment data was the drop (0.2%) in the jobless rate to 3.5%, driven by a large gain in household employment. According to BLS, household employment rose 391,000 in September, and by 1.264 million over the past three months. The three-month gain in household employment is the second largest quarterly gain of the current economic cycle, and is nearly three times the Q3 gain in payroll employment.
Household employment is based on a separate survey of people and tends to be very volatile, with outsized gains often followed by monthly and quarterly declines. The “bridge” between the two surveys is withheld income tax receipts as tax collections are the “hardest of hard” data, capturing in real time monies taken from currently employed workers paychecks. Withheld tax receipts over the past 6 months show little growth relative to the comparable period one-year ago, indicating that payrolls, especially the figures for production and non-supervisory workers, are painting a more accurate picture of labor market conditions and the direction of the general economy.
The bottom line is that the underlying labor market conditions have weakened and business surveys confirm the slowdown in hiring and overall growth.