Markets & Finance

The Hurricane Season's Legacy


By Michael Englund The devastating late-summer hurricanes continued to have a significant impact on the U.S. labor market in October. The employment report for the month, released Nov. 4, showed a rebound of 56,000 in the headline nonfarm-payrolls number on the month -- well short of economists' median forecast of a 110,000 rise. The payrolls figure for September was revised to a decline of 8,000, from a previous drop of 35,000.

Among other components of the report, the unemployment rate fell to 5% from 5.1%. Average hourly earnings rose a hefty 0.5%, while hours worked were steady at 33.8, from an upwardly revised 33.8 reading in September, vs. 33.7. Factory employment rose 12,000, with a gain of 33,000 in construction jobs.

FILLING THE VOID. Since Hurricane Katrina's late-August landfall, we would estimate that payroll growth has taken a total hit of about 350,000, though the October number is subject to the same upward revisions that are now standard for the monthly payroll figures. This may ultimately take the net hurricane hit closer to 320,000.

And it's clear from the hours worked and average earnings figures that the U.S. economy is working overtime to fill the hurricane void, with employers paying a wage premium that will boost nominal fourth-quarter activity. The post-hurricane jobs shortfall mentioned above is almost exactly the equivalent of a 0.1 rise in the average workweek, which indeed rose to 33.8 hours in September and October. The result is that the hours-worked index -- which links the monthly payroll report to its quarterly gross domestic product (GDP) ramifications -- will post only a small growth moderation through the post-hurricane period.

The hurricane hit is concentrated in the payroll component of hours-worked growth. Though the hurricane primarily impacted September, the late-quarter timing puts most of the growth impact in the fourth quarter, when we now project a downward wiggle in payroll growth that reflects the lean September and October readings. We at Action Economics expect this to be followed by a bounce in the first quarter, before we resume a 150,000-to-200,000 monthly payroll-growth trend, which should be expected at the midpoint of an economic expansion cycle.

NEW YEAR, NEW JOBS? If we look at the workweek component of the hours-worked index, however, we see the exact opposite pattern. Workers who retained their jobs worked overtime, thereby explaining the limited impact on overall hours-worked growth, despite the hurricane disruption. The diversion of hours-worked to an increase in the workweek -- instead of jobs being added -- is coming at a price for employers. This is indicated by the 0.5% surge in average hourly earnings in October, which left a rise in year-over-year wage growth, to 3.3% in October, from 2.7% in September.

This most recent pop in earnings growth is likely an anomalous post-hurricane effect. Yet it's part of a broad cyclical uptrend in wage growth through the current expansion that has accompanied the broad downtrend in the unemployment rate below the middle of the 5%-to-6% range, which reinforces the notion of a "natural rate" in the 5.5% area.

The rate's drop to 5% in October leaves this measure poised to enter the new year with a "4 handle." This would be the first time since August, 2001, that we had an unemployment rate below 5%, if we don't count the one-month drop in this figure to 4.9% this past August -- just before Hurricane Katrina struck.

ROBUST FACTORY SECTOR. Beyond the fit of the workweek and payroll figures for September and October to a fairly consistent post-hurricane story, the other news in the report was that construction and mining employment is accelerating as expected. Factory activity also is bouncing sharply, as one would anticipate with a sizable rebuilding effort in place over the coming months.

The massive rise in aggregate factory hours in October will likely translate to a 1% industrial-production surge on the month. The industrial-production measure is now poised for a 3.5% growth rate in the fourth quarter, following a hurricane-depressed 1.3% reading in the third quarter.

The robust factory sector, combined with the hefty round of October pay increases, should also ensure a solid personal-income gain in October; our estimate is 0.6%.

INCOME OUTLOOK UP. In total, the shortfall in headline payroll growth in October was more than offset with strength in the workweek, to leave a surprisingly small net negative impact on hours-worked growth through the post-hurricane period. This was an eye-opener, given assumptions that we should see a negative GDP impact over the near term. The surprising strength in hours worked was accompanied by a solid wage gain for the month, which bolstered the outlook for income beyond the strength in hours-worked.

The mix, in our view, was good news for the economy and bad news for an inflation-wary Federal Reserve.

Englund is chief economist for Action Economics


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