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Post-Sandy, Preelection, Little Market Reaction to Jobs Numbers

With the election approaching and with Hurricane Sandy aftermath effects still playing out, markets are not reacting very strongly to Friday’s report.

  • Michael Hood

The October labor market report for the U.S., released Friday morning, suggests modest improvement for the economy at the start of the fourth quarter. Employment rose at a satisfactory pace, with gains spread widely by sector. Although the jobless rate ticked higher, it reversed only one third of the previous month’s fall, and the October increase reflected a jump in participation (such that the employment-to-total-population ratio actually moved up). While wage increases remain meager, job gains are keeping total household income climbing at a pace consistent with decent consumer spending growth (especially because inflation is going through a soft patch, supporting real income).

A few specifics:

– Jobs increased 171,000 in the establishment survey, with upward revisions to the two previous months totaling 84,000. That puts the three-month average at 170,000, a pace generally consistent with (1) a slowly falling unemployment rate; and (2) economic growth at a trend-like or slightly better pace.

– Consensus expected a 125,000 payroll figure, though that number probably would have moved higher in the wake of yesterday’s strong-looking ADP employment survey, to perhaps 150,000. Friday’s report thus represents a modest upside surprise.

– The establishment survey found job growth across most sectors, including manufacturing, construction and many services. The increase in manufacturing employment corroborates October’s improvement in the ISM survey, suggesting that industrial weakness — a global phenomenon of the past several months — may have run its course. Within services, retail and restaurant jobs showed strong gains. By contrast, the mining sector, often thought of as one of the economy’s most dynamic, has shed jobs for five consecutive months. Natural gas activity has slowed this year in the face of weak prices.

– The unemployment rate rose one tenth of a percent to 7.9 percent. In September it had fallen 0.3 points to 7.8 percent. The October rise, however, does not look like bad news: Employment in this part of the report (which is distinct from the establishment survey) rose strongly for the second consecutive month, by 410K. The labor force grew even more quickly, though, pushing up the reported jobless rate. Employment as a share of the total population climbed to 58.8 percent, versus 58.7 percent in September. That ratio still looks miserable compared with precrisis figures (which typically ran within a 62 to 64 percent range) but does represent a post-Lehman high.

– Wage growth remains very sluggish. Indeed, average hourly earnings stayed flat in October and were up just 1.6 percent from October 2011. It will be difficult for any genuine inflation process to get going with wage gains so restrained. Less helpfully, it will also be difficult for consumer spending to boom under these circumstances. Hours worked were also flat in October. The increase in employment, though, is keeping total household income growing at a somewhat acceptable pace — 2.5 percent in October, measured in 3m/3m annualized terms. With inflation very quiet at the moment, that rate of income growth should translate into real consumer spending increases of about 2 percent.

– Perhaps the best feature of October’s labor market report is what it didn’t show — namely, intensifying business caution. In recent months business capital spending has slowed sharply. Indeed, during the third quarter it posted an outright fall. Firms may have been circling the wagons in response to the earlier intensification of the euro area crisis and, more recently, homegrown worries about the fiscal cliff. The risk has been that this increased caution would spread to hiring, ultimately derailing consumer spending. That does not appear to be happening. Instead, labor market conditions have improved in the past few months. With consumer confidence also up, household spending is taking the lead in driving growth at the moment.

– Recent developments in the labor market look unlikely to affect the Fed’s thinking in the short run. While hiring has picked up a touch and the unemployment rate has dropped, joblessness remains, from the Fed’s perspective, unacceptably high. Taking September and October together, the implied monthly average fall in the unemployment rate comes to 0.1 p.p. per month. At that rate, the unemployment rate would reach the top of the Fed’s medium-term forecast range (5.2 to 6.0 percent) only in the second quarter of 2014. Under these circumstances, the Fed will likely want to keep providing as much support to the economy as is feasible. Asset purchases will therefore very likely continue at their current pace beyond the end of this year, including ongoing buys in the MBS market and, once Operation Twist is finished in December, outright purchases of Treasuries.

With the election approaching and with Hurricane Sandy aftermath effects still playing out, markets are not reacting very strongly to Friday’s report. Stocks are holding Thursday’s gains but not advancing further, and 10-year Treasury yields have unwound much of an initial sell-off, currently standing about 2bp higher on the day.