Just as Gulf Coast states were bracing for the onset of hurricanes Harvey, Rita and Irma in August and September, so the markets have been bracing for the effects of those storms on the economic data. Today’s payroll data did indeed show large impacts of the hurricanes. Market response so far has rightly ignored the impact of the hurricanes on job growth, but mistakenly ignored the equally sharp effects of the hurricanes on average hourly wages.
Private-sector payroll jobs showed a decline of 40,000 in September. The measure we track, private jobs excluding construction and retailing, showed a decline of 23,000. That is a shortfall of about 190,000 jobs from the growth trends of recent months, which is a good estimate of the impact of the hurricanes.
Now, keep in mind that the jobs data don’t count people actually working. Rather, they count people on payrolls. So, if you earned a weekly, bi-weekly, or monthly salary from a corporation in the Gulf and couldn’t get to work during the September pay period because of the hurricanes, you still received a paycheck, and you still showed in the payroll data. The 190,000 workers effectively cancelled out by the hurricanes—for one or two months—are people punching a time clock who get paid by the hour.
None of this is rocket science, but just the basic facts of the payroll data. However, these points delineate the distortions to today’s hourly wage data. What those data measure is not the growth in workers’ wages, per se, but rather, the change in the average wages of all workers showing up on payrolls. Take 190,000 lower-wage workers out of the data, and the average wage of the remaining workers must go up. That average hourly wages suddenly spiked a whole 0.2% relative to previous growth trends is clearly a hurricane effect, yet the markets today are acting as if wage inflation has suddenly broken out. (Meanwhile, note that the hurricanes reduced payroll employment by a comparable 0.2%.)
In addition, the markets are ignoring some very significant downward revisions to previous months’ job counts. July private-sector jobs were revised downward by a relatively huge 69,000 jobs, and that revision applied to a pre-hurricane month. This downward revision may be the only non-distorted datum in all of today’s release. No, it is not an indication of impending doom, but it does underline the fact that economic growth (and inflation) are not accelerating the way many Street pundits claim they are.