Today the Federal Reserve released the September change in nonfarm payrolls which came in at 142,000 jobs versus the estimate of 201,000 jobs. Also, August data was revised down from the originally reported 173,000 jobs to 136,000 jobs. This data was seen a disappointment and the bond market reacted negatively. According to Bloomberg data, the Federal Funds Futures Market, which is a market in which traders can speculate on the direction of the Federal Reserve raising interest rates, shows only a 2 percent probability of the Fed raising interest rates this month. The probability of the Fed to raise interest rates in December has dropped from a 40 percent probability early this month to a 29 percent probability as of today.
It is important to remember that the U.S. has created an average of 200,000 jobs for the last six months. Since the depth of the financial crisis, the unemployment rate has gone from over 10 percent to around 5 percent where it is today. We prefer to take the long view as opposed to changing opinion on every incremental piece of economic data. Payroll data is notoriously volatile and is a backward-looking indicator. U.S. consumer spending accounts for nearly 70 percent of our GDP or national income and continues to be robust despite a couple of months of job creation that does not meet expectations.
One of our research partners, Cornerstone Macro, published a note this morning with some facts about the U.S. consumer that are worth sharing:
- Consumer income growth has been a solid 4 percent for the past five years
- Real income expectations are rising for the first time in 20 years
- Consumer confidence is trending higher across all income levels
- Small businesses are having a hard time filling jobs
- Increasing construction spending is a major support to construction employment
- Increasing manufacturing construction is a support for manufacturing employment
- Average hourly earnings is in a rising trend for finance, business services, construction, health and education
- Auto sales came in at a seasonally adjusted annual rate of 18.2 million units, the most in more than 10 years
We still believe that the domestic economy and the U.S labor market are continuing to heal from the Great Recession. The headwinds from emerging market turbulence and a strong dollar are not large enough to derail this economic expansion.
Our Takeaways from the Week
- Job creation for September and the negative revisions for August did not meet economists’ expectations; however, the equity markets largely ignored the data finishing up modestly for the day
- The bond market reacted more with the 10-year Treasury bonds finishing the day below 2 percent