“Decent” is the New “Great”: Why the Fed Will Love the Pretty Good October Jobs Report
Published: Friday, November 4, 2016 | Author:
The October jobs report featured a slight downside surprise in the headline and a few soft details, but overall it was more than strong enough to support the Fed proceeding with its expected rate hike in December. Notably, wage growth picked up, both vindicating the Fed’s patient approach thus far and suggesting it is time for the Fed to get on with another rate hike. That said, a whole other month of data, including another jobs report, awaits before the next Fed meeting.
This was one report where it comes down to the headline numbers: nonfarm payrolls rose by 161,000 (down from an upwardly revised 191,000 in September), the unemployment rate ticked back down to 4.9% (from 5.0%), and growth in average hourly earnings over the last 12 months rose to 2.8% from a revised 2.7%. Those three things tell the tale. Together, they support the notion that the U.S. economy is now at or near full employment: wages are picking up, the unemployment rate has slowed its decline, and the trend in payroll growth continues to moderate, but still remains more than strong enough to absorb new workers and push down the unemployment rate. Specifically, the 3-month moving average in nonfarm payrolls is down to 176,000 versus 282,000 for all of the 2015.
The stand-out figure was the acceleration in wage growth – this was its fastest rate in 7 years. That suggests that wage pressures are mounting as the labor market may have reached full employment. Previously, wage growth had been fluctuating around the upper end of its recent range and anecdotal reports were cropping up that wage pressures were broadening out into more industries and occupation types.
Turning to the job figures themselves, net upward revisions to the prior two months of nonfarm payrolls (by 44,000) were encouraging, as was the healthy breadth of gains across service-providing industries. There was a surprisingly large increase in government payrolls – possibly related to the election. There was also a surprising, if small, outright decline in retail jobs. The BLS seasonal adjustments may have overcorrected for holiday hiring, since e-commerce is a relatively recent phenomenon and it takes time for the BLS to incorporate shifts in the economy into its seasonal adjustments. Both manufacturing and mining and logging extended their recent losses, albeit only modestly.
There were signs of softness in the household survey too: labor force participation reversed the prior month’s uptick and involuntary part-time work was virtually unchanged at an elevated level. Taken together, the decline in the underemployment rate (from 9.7% to a post-recession low of 9.5%) was driven by the decline in labor force participation. Also, all the decline in unemployment was concentrated in short-term unemployment, leaving many of the long-term unemployed still out in the cold.
Fed policymakers will greet this report with great relief: the labor market and even inflation are finally starting to come in line with the traditional models that they have been hoping to rely on in setting their policy. An overly robust report would have suggested that they are already behind the curve in raising rates. Plus, a close-to-expectations report means that the Fed can stay out of the headlines until after the election.
While it’s still too early to take a victory lap, there are signs here suggesting both that the gradualist approach to removing policy accommodation has helped sustain job growth and that there is now less scope to absorb more labor market slack from monetary policy alone. That, in turn, means that it’s time to take the next step in the tightening cycle – right in line with market expectations for the Fed.