September 2017 Unemployment Update

Continuing our ongoing coverage of the labor market, the September Employment Situation release from the Bureau of Labor Statistics shows return to tightening of the labor market.  The headline U-3 unemployment dropped by 0.2%, beating May’s low, as did the U-6 “underemployment” rate which dropped by 0.3%.

The decline in unemployment is particularly surprising given that the Employment Situation included a statement that it estimated that Hurricanes Irma and Harvey making landfall in September had a net negative impact on employment (as we noted was likely last month).  Whether that was due to the timing of the disaster suppressing the effects for this collection (apparently workers who missed the week of 9/12 still count as employed, and Irma hit on 9/10) or the impacts just being too small in comparison with the rest of the economy, is unclear.  

Regardless of the impact of the hurricanes, we are still seeing negligible increases in wages, even under this tight labor market, which really puts in question the Federal Reserve’s recent interest rate increases, and stated plans to start selling off the $4.5 trillion in bonds it purchased during its Quantitative Easing programs.  Without wage increases, there’s no upward pressure on inflation, which for the last 5 years has only strayed above the Fed’s 2% target for brief periods, most recently in the immediate aftermath of the 2016 election.  While the desire to normalize Fed policy is understandable, doing so while the economy is still on a relatively low idle seems like a risk that’s hard to justify, particularly because even a spike in inflation at this point would be easily contained by a interest rate increase in response.