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|  | OCTOBER 11, 2004
 DAVID WYSS ON THE ECONOMY By David Wyss September's Disappointment for Jobs The month's weak employment might even prompt the Fed to skip raising rates again at its next meeting in November The 96,000 rise in September payrolls was very disappointing, certainly to Republicans. After a promising spring, job growth has averaged only 101,000 per month since June. The latest report reflected more special factors than usual, but even taking them into account, it was discouraging. The two big surprises were a 15,000 drop in retail jobs and the 18,000 decline in manufacturing employment. The most obvious of the special factors affecting September's figures is the spate of hurricanes (see BW Online, 10/8/04, "Hurricanes Leave Job Growth Soggy"). People were evacuated from their homes, which could have reduced employment in the Southeast. Although the Bureau of Labor Statistics (BLS) says the tempests were "not enough to change materially...the employment situation," they could easily have swung the job count by 50,000 or so. A worker has be unpaid for an entire pay period to be excluded from payrolls, and with the evacuations, many may have been in that situation. One would expect the hurricanes to have had the greatest impact on retail and hospitality employment. Although the former category was down 15,000, the latter saw a jump of 13,000. In the last seven major hurricanes, overall employment increases were 21,000 lower in the affected month compared to the average for the six previous months. WEAKNESS OVERSTATED? The other major special factor was the late survey week. The period's Sept. 12 cutoff date fell on a Sunday, meaning the September survey was done as late as it could possibly be done. Many summer jobs end Labor Day weekend, so they didn't appear in the survey. In a normal September survey week, summer jobs get counted. As a result, the month's weakness may be overstated. The drop in retail employment was concentrated in general-merchandise stores, where payrolls fell 10,700. September marks the third consecutive decline for both overall retail and general merchandise, and these results are certainly consistent with the weak sales reported by major chains for the month. Government employment rose 37,000, with half that number accounted for by increased educational employment at the start of the school year. Also, state governments are getting their budgets back into balance, and major layoffs appear to have come to an end. STAYING JOBLESS LONGER. The national unemployment rate held at 5.4%. Both the labor force and employment dropped in the household survey. The unemployment rate shouldn't have been affected by the hurricanes, since people temporarily displaced wouldn't have reported themselves as unemployed (and they may not have been found by the surveyors anyway). One disturbing note is that the average duration of unemployment rose 0.6 week, to 19.6 weeks. Although layoffs have diminished, those who are unemployed are staying that way longer. Average hourly earnings rose 0.2%, consistent with recent performance. The workweek was stable at 33.8 hours. The BLS included its preliminary estimate for the next benchmark revision, which won't be incorporated into the data until February. Based on current data (for March, 2004), the bureau expects the level of payrolls to be revised up by 236,000, or about 20,000 per month for the 12 months ending last March. This is about an average revision, but substantially less than some Republican sources had suggested. A QUESTION OF TIMING. The weaker employment data could convince the Federal Reserve to pass on raising rates at its Nov. 9 policy meeting but raise them again December. The timing will depend on the next employment report, which will be out after the election but before the Fed's next rate-setting meeting. The critical point is that rates will be rising for the foreseeable future, but the meeting-to-meeting timing will depend on the monthly data. Bond yields dropped in response to the weak employment report, with the 10-year note falling back to its week-ago level of 4.1%. We think yields are too low for the degree of tightening we expect from the Fed. The continued investment inflow from abroad, in part because of central bank currency intervention, is holding yields down. Corporations are sitting on cash, as strong profits aren't being spent on investment, which also holds down yields. But as the Fed continues to tighten, we expect yields to rise.  Wyss is chief economist for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  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