KEY DATA: Payrolls: +261,000; Revisions: +90,000 (+51,000 in September); Unemployment Rate: 4.1% (down 0.1 percentage point)/ ISM (NonManufacturing): +0.3 percentage point/ Trade Deficit: $0.7 billion wider
IN A NUTSHELL: “When you smooth out the weather-induced swings in the data, it is clear the labor market is strong and the economy is solid.”
WHAT IT MEANS: We all assumed that the weak September jobs report was the result of weather issues and that turned out to be indeed the case. The economy added a lot of workers in October, largely making up for the now modest September rise in payrolls. The initially reported September decline was revised to show an increase, so the seven-year run of job increases remains intact. The economy has averaged 162,000 new positions for the past three months and that is right on target, or at least my target. What we saw in October was a reversal of some of the weird numbers that were posted in September. For example, restaurants rehired most of the 98,000 workers they supposedly let go. That makes up much of the swing in the jobs numbers. The oddities in the data make it a waste of time to point out the industry strengths and weakness. I will wait until next month for that.
The unemployment rate declined to 4.1% rate, the lowest in nearly seventeen years. But again, the data have to be viewed with caution. There have been unusually large changes in the labor force, employment and the participation rate over the past couple of months. It is really unclear right now what the unemployment rate will settle down at once the temporary factors come out of the numbers.
There was one other number that shows how we need to approach monthly data with caution. The average hourly wage fell a penny after having risen twelve cents in September. Those changes were largely due to the wild swings in restaurant worker employment. But it shows that the use of average hourly wages as an indicator is really questionable.
The Institute for Supply Management reported that non-manufacturing activity improved in October. New orders expanded robustly, though a touch less so than in September. Hiring improved, which showed in the jobs report.
The trade deficit widened in September. Exports were up but the expanding economy did what was expected, which was suck in even more imports. Oil was one factor but we bought more of just about everything but vehicles. Our exports were driven mostly by oil, as prices were up. It is unclear if this report will change third quarter growth significantly.
MARKETS AND FED POLICY IMPLICATIONS: First of all, today’s employment report was as expected. When you smooth the data, firms are hiring about as many people as they can. That said, the report also shows that incomes are going nowhere. Hourly wages are up only 2.4% over the year, which means that inflation-adjusted income rose by less than 1%. You cannot get strong growth when spending power is increasing so modestly. As long as firms are willing and able to operate with large numbers of unfilled positions, wage gains will remain stagnant. But this economy is in good shape and labor demand is exceeding labor supply. If growth accelerates, it is not clear where firms will find the labor to meet their expanding needs. And a surge in growth that could come from tax cuts would tax the labor markets even more. Like so many other economists, I worry that the tax cuts could create imbalances that would ultimately short-circuit what is now the third longest expansion on record.