October Employment Report and September Trade Deficit

KEY DATA: Payrolls: +161,000; Private: 142,000; Revisions: +44,000; Unemployment Rate: 4.9% (down 0.1 percentage point); Wages: +0.4%/ Trade Deficit: $36.4 billion ($4 billion narrower)

IN A NUTSHELL: “The tightening job market is finally showing up in higher wages, which should make Janet Yellen and lots of workers happy.”

WHAT IT MEANS: Not that facts matter to politicians, but the last major economic report before the election, the October employment report, was really good. Yes, total payroll gains were a little less than expected, but there were significant revisions to the previous two months. Over the past three months, job increases averaged 176,000, which is clearly enough to keep the unemployment rate filtering downward. The October rise was driven by solid increases in the service-producing sector. Health care and professional and business led the way. In contrast, retailers reduced their payrolls. This sector usually adds 20,000 or so jobs and the decline was a major reason this report was only solid, not strong. In addition, manufacturing continues to hemorrhage positions. The recent reports from the Institute for Supply Management point to stabilization in hiring, so hopefully that number will be flat or even positive in the months to come. Government payrolls swelled at both the federal and state and local levels.

With firms adding more workers, the unemployment rate ticked downward. The so-call “real” unemployment rate, which I call the “really stupid” unemployment rate, hit its lowest level since spring, 2008. It is also not far above the average during the last expansion, so it cannot be said (even if it will be) that the unemployment rate is still high. You can see that in the hourly wage gain, which was quite strong. The 2.8% increase over the year was the highest in this expansion.

The trade deficit narrowed sharply in September, which was a surprise as well. Exports rose and imports fell. This report could lead to an even smaller trade deficit for the third quarter, so don’t be surprised if the first revision to the report shows that growth was above 3%.

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report, especially when you consider the upward revisions to August and September. Of course, politicians live in their own reality, which sometimes bears no relationship to the world or even galaxy that the rest of us live in, so the spin on this report should be fascinating. That said, I have noted in the past that we needed at most 150,000 jobs per month to keep the unemployment rate falling and we are above that. The three month average, which smooth’s out the volatility in the data, is about as good as can be expected given the tightness in the labor market and the inability of firms to find qualified workers to hire. And with the hourly wage number beginning to accelerate, the Fed will have all the cover it needs to raise rates in December. Of course, the November jobs numbers come out before the next meeting, so I cannot say with any level of confidence that the FOMC will indeed tighten next month. But barring a financial market melt down as a result of the election, look for that to happen.