No more slack?

It was the surprise that wasn't. US non-farm payrolls declined by 33,000 in September and it followed an upwardly revised 169,000 gain (from +156,000) in the previous month.

Sure the extent of the fall was less than market consensus for a 100,000 addition - expectations ranged from zero to 140,000 - and it was the first recorded drop since September 2010, but everybody and his uncle expected hurricanes Harvey and Irma to distort the employment numbers. Even the Bureau of Labor Statistics (BLS) says so: "Our analysis suggests that the net effect of these hurricanes was to reduce the estimate of total nonfarm payroll employment for September."

But "There was no discernible effect on the national unemployment rate." The unemployment rate dropped to 4.2% - the lowest level since February 2001 - from 4.4% in August despite increased participation rate to 63.1% from 62.9%.

Perhaps more telling, the U-6 unemployment rate also declined sharply from 8.6% in August to 8.3% in September - the lowest rate since pre-GFC (8.3% in February 2007).

The BLS defines the U-6 unemployment rate as: "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force."

Recall that Fed chair Janet Yellen used this stat to explain the slack in the labour market and therefore, slow wages growth in America.

Slack no more? As if on cue, the September non-farm payrolls report showed that average hourly earnings jumped by a bigger than expected 0.5% in the month of September following a 0.2% increase (revised from 0.1% gain) in August. Year-on-year, average hourly earnings growth accelerated to 2.9% in September - the fastest since December last year - from 2.7% in the previous month.

However, the jump in earnings might as well be distorted by the hurricanes as many of the jobs lost over the month were low-paying ones. As the BLS notes: "Employment in food services and drinking places dropped sharply in September (-105,000), as many workers were off payrolls due to the recent hurricanes."

Still, this doesn't detract from the fact that the annual growth in average hourly earnings had been trending higher since December 2014 (1.9%) even if market expectations for a 2.6% gain last month were met.

This is an improvement from the flat trend recorded between 2011 and 2014 when earnings growth couldn't sustainably rise beyond 2%.

Despite the distortion in September's non-farm payrolls data, one thing is clear the labour market has slack no more or at the minimum, continues to be absorbed as evidenced by accelerating growth in wages.

How soon this will show up in the measured CPI inflation stats remains to be seen but is giving credence to the Fed's view of the transitory nature of low inflation, making the telegraphed 25 basis point rate hike this coming December a certainty.

What's not certain is whether Janet Yellen will still lead the Fed next year.

Read more: USEmploymentAmericaBureau of Labor StatisticsCPIFed Chair Janet YellenHarveyIrma
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