How Hurricanes Harvey and Irma Contributed to the First Payroll Losses in Years

October 6, 2017 by Jon C. Ogg

If you were already bracing for a poor payrolls report for September, your hunch was right. What came as a large surprise, on top of a solid unemployment rate, was that both nonfarm payrolls and private sector payrolls decreased in September. Much of this is due to the impact of hurricanes Harvey and Irma, but there may be some other issues that need considering as well.

Nonfarm payrolls contracted by 33,000 in September, its first formal decline in years. Bloomberg had a projected estimate calling for a gain 100,000, in a range of 0 to 140,000. Dow Jones (WSJ) was calling for a gain of 80,000. Government jobs rose by 7,000 in September.

The private sector payrolls, those jobs that you and I do not pay for via taxes for government workers, showed a loss of 40,000, and Bloomberg’s range was 20,000 to 150,000. One key issue that stood out was that employment in food services and drinking places declined by 105,000 in September. If you factor those out to a net-wash and look at the prior estimates, then you begin to get a clearer picture that this report may not be as negative as it seems from the headlines.

August’s payroll gains were solid on revisions. The nonfarm payrolls were revised up to 169,000 from the preliminary 156,000. The private sector gain of 165,000 for August was revised down only 1,000 to 164,000.

One note from the Bureau of Labor Statistics (BLS) showed an undefined impact from the hurricanes, and it may make the revisions look quite different ahead. That note said:

It is likely that the payroll employment estimates for September were lower due to the effects of Hurricanes Irma and Harvey. We may learn more about the hurricanes’ impact when state employment and unemployment estimates become available on October 20, 2017.

Where the September employment situation report looked positive was in the 4.2% official unemployment rate. Bloomberg was calling for the rate to remain flat at the 4.4% rate reported for August. Another positive was that the labor force participation rate rose to 63.1% in September from 62.9% in August. Average hourly earnings also rose in September, with a 0.5% monthly gain and a sharp 2.9% annualized gain. Also worth noting as a positive was that the number of unemployed persons declined by 331,000 to 6.8 million.

It is obvious that the hurricanes had an impact on September’s report. Otherwise you would not have seen a drop rather than a weaker gain. Also worth noting was that the BLS included a rather long note about how hurricanes Irma and Harvey had an impact. 24/7 Wall St. has included some other live or preview commentary from outside sources as well.

The BLS formal statement about the hurricanes said:

Hurricane Irma made landfall in Florida on September 10–during the reference period for both the establishment and household surveys–causing severe damage in Florida and other parts of the Southeast. Hurricane Harvey made landfall in Texas on August 25–prior to the September reference periods — resulting in severe damage in Texas and other areas of the Gulf Coast.

Our analysis suggests that the net effect of these hurricanes was to reduce the estimate of total nonfarm payroll employment for September. There was no discernible effect on the national unemployment rate. No changes were made to either the establishment or household survey estimation procedures for the September figures. For both surveys, collection rates generally were within normal ranges, both nationally and in the affected states. In the establishment survey, employees who are not paid for the pay period that includes the 12th of the month are not counted as employed. In the household survey, persons with a job are counted as employed even if they miss work for the entire survey reference week (the week including the 12th of the month), regardless of whether or not they are paid. For both surveys, national estimates do not include Puerto Rico or the U.S. Virgin Islands.

The BLS commissioner’s statement on the employment situation actually made 10 different references to the impact of hurricanes. The synopsis of this statement said:

In September, a sharp employment decline in food services and drinking places and below-trend growth in some other industries likely reflected the impact of Hurricanes Irma and Harvey.

The storms caused large-scale evacuations and severe damage to many homes and businesses. In the establishment survey, employees who are not paid for the pay period that includes the 12th of the month are not counted as employed. Many employees in areas affected by the hurricanes were likely off payrolls during the reference pay period for September.

24/7 Wall St. received some comments from Cathy Barrera, who is chief economist at ZipRecruiter. Her note addressed the effect of the hurricanes a bit differently:

The first thing that everyone is going to be talking about today with regards to the BLS numbers is the impact the hurricanes had on jobs. The headline number may seem kind of alarming – because we are used to numbers beating expectations – however, the argument that the hurricane caused people to lose their jobs isn’t borne out by the data.

If you look at the household side of the data, everything here is good news. The labor force participation rate is up slightly– the labor force participation level is up and the number of people not in the labor force is down. Both are noteworthy — due to population growth it can be that both numbers increase or decrease. In this case we are truly seeing more people move into the labor force.

In addition, the number of unemployed people is down AND the number of people who are employed is up this month by 906,000 – between July and August that number went down, so that it would be hard to argue that the hurricanes had a negative impact there.

If it were the case that the job losses on the establishment side equated with job losses for individual workers, you would expect all four of these indicators–labor force level, number not in labor force, employment level, and unemployment level– to be moving in the opposite direction from what they did.

I am pleasantly surprised by the drop in unemployment to 4.2%. While we may be concerned that this drop is due to people leaving the labor force, that is not the case. The decline in unemployment together with the rise in the labor force participation rate suggest that the labor market is holding strong.

Also noteworthy is that the year-over-year wage growth jumped up this month. I would keep an eye on this number to see if it holds steady or returns to its previous level (at around 2.5%) next month.

Citi Personal Wealth Management’s Head of Investment Strategy, Shawn Snyder, released a statement ahead of the actual report warning about expected weakness:

The weakness in the September employment report comes as no surprise. Timely leading indicators such as weekly jobless claims already signaled that the labor market was adversely impacted by Hurricanes Harvey and Irma. It’s hard to hire someone when your business is closed. The more telling economic data release of the week was the ISM Non-Manufacturing report. The headline index, which leads economic activity in the services sector, rose to a 12 year-high and the employment sub-component registered its highest reading since last May. This implies that the labor market remains quite healthy and we should see a rebound in jobs growth in coming months.

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