Employers are making hay while the sun shines. Another very strong report, and largely what you get is what you see: a reaffirmation that job growth has accelerated amid 2018’s fiscal stimulus and improving labor force participation in response to the better employment prospects. We have seen some mixed messages in recent surveys of consumer and business sentiment – let alone financial markets – but the labor market appears to be shrugging them off for the time being. If corporations are concerned about the economic outlook in the medium-term, in the very near term, they still seem focused on bringing in fresh talent to capitalize on the good days while they last.
- Take the number with a little salt, but not too much. While the 3.1% gain in average hourly earnings does not represent a break-out acceleration in wage growth, it confirmed the ongoing gradual upward march of wages.
- The 3.1% gain was a bit inflated by the hurricane-suppressed October 2017 number, but earnings still rose 0.2% on the month, and that’s not bad for a month with a weak calendar effect and a slight rise in average weekly hours (34.5 vs. 34.4 prior).
- If October 2017’s average hourly earnings had instead risen to the November 2017 figure (and November 2017 had instead seen zero wage gains), the 12-month figure for October 2018 would still have been 2.9% – equaling August’s post-recession high and improving on September 2018.
- The combination of solid earnings growth, more hours worked, more jobs, and more of the jobs being full-time – this is all positive for consumer spending and household finance. The concerns about the U.S. economic outlook continue to lie elsewhere.
- An important reason wages are rising: the decline in hires per job opening. That's set to continue, per iCIMS Monthly Hiring Indicator, which front runs the JOLTS report.
The Establishment and Household Surveys
- Reaffirmation of faster job growth in 2018. While the September dip in payrolls now looks more severe than before, the 3-month moving average bounced back to the ~220k range, and the diffusion index rose to a very robust 65.7. Almost every major sector saw an improvement and they all saw positive job growth.
- Manufacturing was notable for its resilience, accelerating its gains to 32k from 18k prior. The manufacturing diffusion index cooled slightly to 62.5 from 65.1, but anything above 60 is very strong. Thus, still no signs that trade tensions are having a significant impact on employment, although this remains an area to watch.
- Retail eked out a gain of 2.4k after declining 32.4k in September. That’s disappointing for the holiday hiring season, but not bad given the job losses already announced by Sears and Steinhoff Mattresses.
- Leisure/hospitality: the rebound in this weather-sensitive sector (42k vs. 0 prior) was a strong reaffirmation that weather was the story for September.
- Business Services and Finance: the modest decelerations in these sectors were more notable as exceptions to the rule than anything else.
- The household survey was similarly strong through its primary and most secondary metrics. The slight rise in the unemployment rate on an unrounded basis was to be expected, and supports the Fed’s forecast of 3.7% unemployment at the end of the year.
- Measures of slack had a very strong month: labor force participation, the employment-to-population ratio, and the population-adjusted employment-to-population ratio all rose; involuntary part-time work, under-employment, and long-term unemployment all fell.
- Indicators of employers responding to the tight labor market by digging deeper for talent were mixed: unemployment continued to fall faster among teens, but it rebounded more for those without college degrees than other categories of educational attainment. Still, that’s not bad for a month in which work absences due to weather remained elevated.
- Outlook for employment: For the next 6-12 months, there will be a lot of searching for signs of cooling job growth as GDP growth moderates – especially in trade-sensitive manufacturing. As with wage growth, timing is hard to predict, but attention to business sentiment surveys will rise (consumer sentiment tends to track more with unemployment). At some point labor supply constraints may become binding, but job growth has outstripped labor force growth for years now, even when GDP growth was significantly slower. A number of well-respected economists have noted that wage growth seems to be tracking with the prime-age employment-to-population. It looks like that metric will keep rising, but can it return to either of its prior two peaks? What’s the right way to adjust it for demographic changes since then? Stay tuned.
- Outlook for markets: Fed policy makers will no doubt feel vindicated by this jobs report, and confident that another hike in December is called for. 2019 will be a very interesting year, as debates about recession risks and when to pause rate hikes both heat up. Also, inflation will be caught between the inflationary effect of tariffs raising input prices versus the disinflationary effect of higher interest rates dragging on housing prices (which were a key buttress to inflation in recent years). With the 2s-10s yield curve hovering just below 30 basis points for the last 2 weeks – despite the volatility in the stock market – the bond market appears to be crouched in expectation as well, poised to spring in either direction once sufficiently convincing evidence emerges.