The September 2018 jobs report showed 134,000 new jobs vs. economists' expectations of 185,000 according to a Bloomberg survey. Jobs also were much lower than the 270,000 revised figure for the month of August. Transportation and warehousing jobs were up 20,000 in September, following a 24,000 increase in August. Job gains in this sector have increased by 174,000 over the year. This rise in transportation jobs likely signals more goods are being shipped cross country, and the vital signs of the economy are improving. Economists have intimated a spike in purchases occurred in expectation of a trade war with China. Whether this activity will abate and dampen transportation activity in the future remains to be seen.
Jobs related to professional and business services rose 54,000, construction jobs rose 23,000, and leisure and hospitality jobs fell by 17,000. Some attributed the decline in leisure and hospitality to the impact of Hurricane Florence. Manufacturing jobs rose by 18,000, which is a good thing since these jobs tend to come with higher wages. President Trump vowed to get manufacturing back on its feet and it appears to track. The question remains, "How much of it has been stimulus induced?"
Unemployment Rate Falls To 3.7 Percent
The unemployment rate fell to 3.7 percent, down from the 3.9 percent reported in August and 4.2 percent in the year-earlier period. This is the lowest rate of unemployment in almost 50 years.
Unemployment was as high at 10 percent in October 2009 and has trended lower ever since. In September 2015, it reached the 5 percent threshold - the rate economists consider full employment. A rate of 3.7 percent is almost surreal. It could portend an extremely strong economy and a rise in wages for workers to keep them from switching jobs.
Average hourly wages were $27.24, up 2.8 percent Y/Y. This followed a 2.9 percent increase in August. Another month of solid wage gains is another data point that inflation could be picking up and consistent with extremely low unemployment. Previously, low unemployment had not accelerated wage growth which had vexed economists.
The unemployment rate does not reflect employment age of people no longer looking for work. The labor force participation rate was 62.7 percent, down from 62.9 percent in August and 63.0 percent in the year-earlier period. There are more than 96 million people outside the labor force - the highest it has been in more than 40 years. I find this alarming. It was in line with the 96 million outside the labor force in August and up from 94 million in the year-earlier period. It also partially explains why the unemployment rate is so low. For now, financial markets and the Fed appear fixated on the low unemployment figures.
Bond Yields Rise
Unemployment has been below 5 percent for years now. However, this jobs report finally rattled bond investors. Ten-year treasury bonds sold off after the report, sending bond yields up to 3.23 percent. They were as low as 2.89 percent at the end of August and around 2.20 percent in September 2017. Record low interest rates may have enticed corporations to load up on corporate debt over the years. Rising bond yields make it more expensive for corporations to refinance their debt.
Total outstanding non-financial corporate debt is now around $9 trillion - nearly 40% above its 2008 high. This bubble in bonds could trigger the next financial meltdown, and rising rates will not help the matter. Stocks also sold off after the jobs report. The Dow Jones Industrial Average (DIA) is down about 1 percent. Both rising interest costs and rising labor costs could crimp corporate earnings going forward. That seems to be the biggest fear for investors.
Last month the Fed hiked interest rates and intimated more rate hikes were in store. The September jobs report could embolden the Fed to maintain its current course of rate hikes. I believe the biggest risk to the stock market remains long-term rates. Rates below 3 percent were extremely bullish. I still believe it is a stock picker's market, yet there could be some volatility ahead. Rates at 4 percent or above could be very bearish for stocks, but we are a long way from that threshold.
Long-term bond rates well below 4 percent likely means the stock picker's market remains intact. The Goldilocks scenario is still here but certain tech stocks with stretched valuations and stocks of companies with high debt loads could face headwinds.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.