October Employment Report and September Trade Deficit

KEY DATA: Jobs: +250,000; Private: 246,000; Unemployment Rate: 3.7% (unchanged); Wages (Over-Year): 3.1%/ Trade Deficit: $54.0 billion (up $0.7 bil.)

IN A NUTSHELL: “Continued strong labor demand, helped by a rebound from hurricane-depressed levels, is putting pressure on wages.”

WHAT IT MEANS: So, where is this lack of workers that every businessperson is complaining about? Maybe they cannot find “qualified” workers, but they sure seem to be able to find “qualified enough” employees. Job growth soared in October after having slumped sharply in September. Despite statements that the hurricanes didn’t affect the data, it appears they did. For example, restaurant payrolls declined by 10,000 in September but surged by 33,500 in October. Really? Retailing dropped by over 32,000 in September but rose a little in October. Another, huh? Over the past two months, the average gain was about 180,000, right where it is expected to average, at least for a while. That said, the report was still remarkably strong. Every major sector posted a gain and job increases were reported in 65.7% of the 258 industries. In other words, the increases were broad based. There was strong hiring in manufacturing, health care, transportation and professional services.

With employment surging, you would think that the unemployment rate would decline, but it didn’t. In part, that was due to a jump in the labor force, with the participation rate rising. While that is good news, the participation rate has been in a tight holding pattern around the current level for the past four years. At least it is not falling. But there is still a shortage of workers and wage gains over-the-year broke the 3% rate for the first time since April 2009, which was near the end of the Great Recession. Then, wage increases were decelerating. Now they are rising.

The trade deficit widened again in September. This time, though, the rise in imports was almost offset by an increase in exports. Exports had been on a downward trend, but hopefully, the bleeding has been staunched. We shall see. Overseas shipments of energy and aircraft surged, while foreign sales of consumer goods and vehicles were also up. On the negative side, soybean exports collapsed, but we may have finally seen the end of the wild swings in this component. On the import side, we bought a lot of consumer goods and it looks like much of the demand for capital goods is being met by foreign companies. There were cut backs in our purchases of food, energy and vehicles.

MARKETS AND FED POLICY IMPLICATIONS: That the job market is strong is hardly a shock. What is surprising is the ability of companies to find workers. Even if you average the last two months to smooth out the hurricane factor, you still get a level of job gains that seems to be unsustainable, except that most economists have been saying that for months. There has been a pick up in labor force growth, but that has been only enough to keep the unemployment rate from dropping rapidly. In October 2017, the unemployment rate was 4.1%, compared to 3.7% now, which is not a large decline given that 2.5 million jobs were added in the past year. But we are seeing wage inflation accelerate and while the surge in payrolls may be the eye-opener for the press and politicians, the 3.1% wage gain will be the data point that catches the attention of the Fed members the most. And they will not be happy about it. Look for a comment about wages in the FOMC statement that will be released next Thursday. It could be couched in a way that makes it clear the Fed will raise rates not only in December but in much of 2019 as well.