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IN A NUTSHELL:“Remember those stories about job growth faltering? Well, never mind!”
KEY DATA: Payrolls: 271,000; Revisions: +12,000; Private: 268,000; Unemployment Rate: 5% (down from 5.1%)
WHAT IT MEANS: Yesterday I noted that the August and September payroll increases seemed a little “light” and thus job gains could be better than forecast. However, I didn’t think the October report would be nearly this good. Job gains rebounded sharply and the increases were across the board as nearly 62% of the industries posted gains. Despite problems with the strong dollar, even manufacturing managed to eke out an increase. But the strength was in construction and most service industries. Large increases were reported in retail trade, professional and business services, health care and restaurants. The financial and warehousing sectors pitched in a little and even government was up. Yes, there were some weak areas. The energy sector continued to cut workers, as did information services and transportation.
On the unemployment side, the rate “fell”. Well, not really. In September, the unemployment rate was 5.051%, which was rounded up to 5.1%. In October, it was 5.036%, which was rounded down to 5.0%. The change: 0.015 percentage point. In other words, no change at all. Still, with the labor force rising sharply, the number of unemployed down a touch and the participation rate stable, you cannot criticize the change too much. The rate was the lowest since April 2008. The so-called underemployment rate, which adds in people who cannot get full time work and drop outs, hit its lowest rate since spring 2008 as well.
Maybe the best number was the 0.4% rise in hourly earnings. Wages are up 2.5% over the year, which may not be great but it is the best rise since July 2009. The tightening labor market may finally be having an impact on wages, though the jury is still out on that. It will take a few more months of solid increases before we can say a trend is in place.
MARKETS AND FED POLICY IMPLICATIONS: In yesterday’s note I also argued that “data driven” made no sense because the data were so volatile. Today’s report just confirms that belief. It is doubtful that we will be seeing very many future payroll reports above 250,000. Indeed, the three-month average of 187,000 is right where most economists expected it to be. So the labor market picture really hasn’t changed, though perceptions based on the past couple of months of data have. The odds now favor a rate hike in December, but what happens if the job gains decelerate sharply in the November report? My guess is that as long as we get a number above 125,000, the Fed will have what it needs to start normalizing rates. Criticism of the Fed’s logic and approach notwithstanding, if data matter and the latest data matter the most, then investors must assume a December rate hike is coming, at least until we get the next employment report. As for the markets, we will find out if investors prefer strong growth to low rates. This report should raise hopes that earnings growth could improve but if investors prefer the Fed’s low rate drug, equity prices could fall.