×

The jobs report isn’t a game-changer for the Fed

  • The U.S. lost 33,000 jobs in September vs. expectations of a 90,000 gain due to the devastating effects of Hurricanes Harvey and Irma.
  • But Natixis economist Joseph LaVorgna says the real story in this jobs report is the broad-based strength in the rest of the data.
  • That includes a huge jump in employment from the household survey, a measure that tends to be less affected by weather, and wage growth.
  • This report isn't a game-changer for the Fed. Policy makers should continue to remove monetary accommodation at a gradual pace, LaVorgna says.

The real story in the September employment report wasn't the weakness in hiring last month, but rather the broad-based strength in the rest of the data. While nonfarm payrolls fell a hurricane-related minus-33,000 in September, the first drop in seven years, significant pockets of strength can be found elsewhere in the release.

For example, household employment, a complimentary series to the payroll data which tend to be less affected by the weather, rose a massive 906,000 last month. This was the largest monthly increase in nearly four years. Last quarter alone, household employment increased nearly 1.2 million compared to just 274,000 in the payroll series.

The big gain in household employment had several positive effects. One, it helped lower the unemployment rate by a couple of tenths to 4.2 percent, which is a new cyclical low. We have to go all the way back to February 2001 to find a similarly low unemployment rate. But the good news does not just stop here.

Two, the U-6, the most comprehensive measure of labor underemployment that captures people who left the workforce as well as those who can only find part-time jobs, fell 0.3 percent to 8.3 percent. This series is now 60 basis points below it pre-financial crisis/Great Recession average. Perhaps this tightening in labor-market conditions is finally putting some upward pressure on wages.

"[I]t would be imprudent for the Fed to dampen economic activity as a means to choke off faster wage growth, a development that has been so lacking in the current business cycle."

Average hourly earnings increased 0.5 percent last month after a small upward revision in August. Over the last year, earnings are up 2.9 percent. While the increase is modest relative to history, this still represents the fastest 12-month change in wages since the economic recovery began more than eight years ago. Bigger increases are likely if the economy continues to expand, as we believe it will, but the Federal Reserve should not become overly worried about inflation pressures.

Perhaps the most important news with the employment report concerns the labor force participation rate, which finally appears to be trending higher. After making nearly a four-decade low in September 2015, participation has been gradually moving up. And last month, it increased a couple of tenths to 63.1 percent, which is the highest reading in labor force participation since early 2014.

To be sure, the labor force participation rate remains historically quite low — it was nearly three full percentage points higher in December 2007, which was just before the onset of the recession. According to the Bureau of Labor Statistics, the pool of available workers totals 12.4 million. These are people who could potentially reenter the labor market, thus mitigating possible labor market shortages that have occurred in the past when unemployment has been well under 5 percent.

Despite the noticeable improvement in the September employment data, nonfarm payrolls aside, the Fed should continue to remove monetary accommodation at a gradual pace. After all, inflation has consistently undershot the Fed's 2 percent inflation target for the last five years, and the prospect of tax reform, even if modest in scope, could help lift the economy's underlying potential growth rate. Hence, it would be imprudent for the Fed to dampen economic activity as a means to choke off faster wage growth, a development that has been so lacking in the current business cycle. Hopefully, the next Fed Chair will have a similar view.

Commentary by Joe LaVorgna, the chief economist at Natixis CIB Americas, which is the international corporate and investment banking, asset management, insurance and financial services arm of Groupe BPCE, the 2nd-largest banking group in France. Previously, Joe was the chief U.S economist at Deutsche Bank Securities.

Follow CNBC's Opinion section on Twitter @CNBCopinion.

WATCH: Jobs report just a 'blip'