Even more than most, the October jobs report rewards focusing on the trend lines. While the establishment and household surveys extended their recent divergence, both surveys featured tantalizing signs of the labor market not only continuing to tighten, but also to normalize. The Fed has one more inflation report and one more jobs report before its next meeting, and on balance this report seems unlikely to give them any pause before hiking rates again in December.
Here’s the cheat sheet:
Despite all the disruptions of the hurricane season, the establishment survey looked surprisingly normal. The rebound and upward revisions all looked roughly in line with the precedent of Hurricane Katrina, given how 2017’s jobless claims have behaved relative to 2005’s. Moreover, at this mature stage of the economic expansion – the third-longest since World War II and with a record 7-year streak of job growth – traditional economic models would expect job growth to moderate toward the trend growth in available workers. Lo and behold, growth in nonfarm payrolls seems to be moderating ever so gently. Year-to-date in 2017, the monthly average has been 169,000, whereas its annual average was 192,000 or higher over 2013-2016.
Aside from reversing a few weather-related anomalies, the industry breakdown confirmed some ongoing trends. Predictably, leisure & hospitality had a big month (106,000 vs. -102,000 prior) as restaurants and bars remained the swing factor. Somewhat surprisingly, construction job growth was unchanged (11,000) and transportation & warehousing slowed (8,400 vs. 25,100), which was a disappointment relative to expectations for post-hurricane reconstruction to support these categories. It now appears that the transportation & warehousing bump may have been confined to September (25,100 vs. 6,700).
Away from those sectors, the most striking thing about the breakdown was how much it conformed to long-term trends. Retail trade (-8,300 vs. 6,700), information (-1,000 vs. -3,000), and utilities (0 vs 400) all suffered. Professional & business services (50,000 vs. 22,000) and healthcare & education (41,000 vs. 22,000) both prospered. In fact, the diffusion index dipped from an upwardly revised 61.1 to 59.6, indicating job growth was slightly less well diversified than in September. Better news came from temporary services (18,300 vs. 7,800), which suggests that even if we are in for further moderation, this job market still has plenty of steam left in it.
The other item looking a bit more normal in this report is wage growth. Not because of the October or September figures, which were heavily influenced by that wild swing in the low-wage positions at restaurants and bars, but because the upward revisions to July and August remained intact enough to suggest that wage growth is turning back up toward its post-recession high (2.9%, visited in December 2016). This was confirmed by the third-quarter Employment Cost Index and the fact that wages could accelerate at all despite slowing consumer-price inflation is a testament to the tightness of today’s labor market. The Fed will be sure to take note.
The abnormal part of this report was definitely the household survey, but even here there were signs of a more traditional dynamic taking hold. Sure, the unemployment rate again dropped out of proportion to the move in payrolls. It has fallen 0.6 percentage points so far this year, compared to 0.3 in 2016 (when nonfarm payrolls averaged 187,000 per month) and 0.6 percentage points in 2015 (when nonfarm payrolls averaged 226,000 per month). Still, the unemployment rate can be noisy and has been known to bounce around in a range of about 0.3 percentage points as recently as the second half of 2016, so it looks likely to retrace a bit and realign with the establishment survey. Similarly, the decline in the labor force participation rate seems like noise; it continues to bounce around the range it has maintained since late 2013, as the tug of war continues between the robust labor market and an unfortunate demographic trend.
More tantalizing was the large drop in the “U6” underemployment rate. Its distance above the unemployment rate is now back to its average during the 1994-2007 “old normal” period. Whether that will hold remains to be seen, but this seems to suggest a return to a more normal dynamic and a virtuous circle of strong demand for full-time workers, who then should be more confident and able to spend freely elsewhere in the economy. Part-time and contingent work are here to stay, and more likely than not to keep growing as a proportion of employment, but it’s not clear that technological innovation is enough to maintain the outsized wedge between underemployment and unemployment we have seen over the prior 84 months of positive job growth. It’s a very crude comparison, but just look at e-commerce: hugely influential and growing fast, but pure e-commerce payrolls are still a modest portion of overall U.S. employment.
What will the Fed make of all of this? “Nihil obstat” – nothing stands in the way. The October jobs report didn’t contain any game changers for monetary policy. It suggested that the hurricanes were indeed disruptive but that the underlying strength of the labor market is already reasserting itself. Polciy makers remain concerned that rates are a bit too low given how strong the labor market and overall growth are; given the lagged effects of its policies, the Fed still feels a need to recalibrate even while inflation remains tepid. Most likely, this report will reinforce that view.
As iCIMS’ former chief economist, Josh Wright led a team of data scientists in analyzing emerging trends in the U.S. labor market. With publications ranging from academic journals to national media, Wright previously served as a U.S. economist with Bloomberg L.P., and was a staff researcher at the Federal Reserve.