Strong Job Numbers for October
After two consecutive disappointing jobs reports from the Bureau of Economic Analysis (BEA), analysts were expecting some improvement with the October jobs report. They got far more improvement than they expected.
According to BEA, 271,000 jobs were added in October and the unemployment rate dropped to 5% -- its lowest level since February 2008. The consensus estimate for October was 180,000 new jobs and a steady unemployment rate of 5.1%. In addition, August payroll numbers were revised upward to 153,000 while September numbers dropped slightly to 137,000, resulting in a total of 12,000 additional jobs.
How about wages? It's good news on that front as well. Average hourly earnings increased by nine cents to $25.20 in October, a 0.4% increase for the month. For the year, wages have risen by 2.5%.
After the stellar report, the dollar rose to hit a seven-month high while bond yields rose — two-year Treasuries reached the highest level in 5-1/2 years. Stocks fell earlier in the day but ended up even or slightly higher for the day.
The Final Straw for a Rate Hike?
October job increases were notable in professional and business services (78,000 jobs added) and health care (56,700 jobs added). Retail trade, food services, and construction also saw significant gains, while manufacturing and transportation-related jobs were flat and mining/energy continued to take a pounding with 5,000 jobs lost. That sector has lost 109,000 jobs so far this year.
In essence, domestic areas of the economy shined while export and trade-based industries stayed flat except for energy. This ties in with domestic spending's role in propping up the GDP, as we reported on last week.
Robust job growth across multiple segments, falling unemployment, and higher wages... how can the Fed delay an interest rate hike any longer? Many economists are now increasing the odds that the Fed will act in their December meeting, with some declaring it a done deal. Certainly, it seems more likely now, but who can accurately predict what November will bring? Keep in mind that there is one more jobs report to be released before the Fed's December meeting.
Everybody Back to Work?
Aside from wage increases that are lower than economists (and workers) would like, the only real sticking point for the Fed may be the labor force participation rate, still stuck at the 38-year low point of 62.4%. Low labor force participation looks more like the new normal with each passing month.
Meanwhile, the U-6 unemployment rate that includes the underemployed and those marginally attached to the workforce fell below double digits for the first time since May 2008. The 9.8% U-6 rate constitutes a drop of 1.7 percentage points from October 2014 and 7.3 percentage points from the 17.1% registered in October 2009.
Chief US Economist Paul Ashworth of Capital Economics said, "We still believe that the big story next year will be an unexpectedly strong pickup in wage growth and price inflation." There is not a lot of slack left in the U-6 unemployment rate to pick up, so as long as the unemployment rate continues to stay near 5% and labor participation stays low, wages and inflation should indeed rise.
However, Ashworth also referred to the strong October readings as indication that August and September represented a "blip" in an otherwise strengthening economy. Only on Wall Street does one good data point render two bad data points as outliers. March and April showed a similar "blip." Jobs must be viewed in the context of more than a single month.
The average over the last three months post-adjustment is 187,000 jobs created; for the year, we have averaged 206,000 jobs per month. For all of 2014, we averaged 260,000 jobs per month thanks to huge gains in November and December. Similarly large numbers in November and December 2015 would produce an average of 234,000 jobs per month. That's optimistic, however, as Moody's predicts 190,000-200,000 jobs on average through 2016.
Reaching Important Thresholds
The Wall Street Journal has a series of insightful graphs tracking employment changes since December 2007 on a three-month moving average, which smoothes out monthly volatility. It reveals the steady rise in full-time employment, and why October really was a significant positive mark. The more than 122 million Americans employed full-time in October represents the crossover point from December 2007 when 121.6 million workers were employed full-time. Put simply, we have finally hit stable pre-recession full-time employment numbers.
While this is welcome news, it doesn't account for population growth over the past eight years and the jobs needed to accommodate this larger population. That fact was also accounted for in the WSJ analysis. According to the Hamilton Project, the economy needed approximately 2.9 million more jobs to fill the workforce-adjusted gap. They project that to occur in March 2017 at current job growth levels.
That's a main reason why Janet Yellen and a few of the Fed governors have been concerned about raising rates and putting brakes on the economy. Despite this protracted period of historically low rates, the US economy has seen only modest job growth. We’ve now reached the 5% unemployment rate that has been the historical trigger for inflation and wage increases, but combined with a poor labor participation rate, is 5% unemployment as meaningful as it used to be? That remains to be seen.
Our takeaway from the September jobs report was that we wouldn't be surprised to see a decent jobs report in October or November that starts the argument that the economy is back and interest rates are almost certain to rise. Sure enough, that's what we have in October. However, when averaged, economic growth and jobs are still chugging along at the same relatively modest pace.
We do expect the Fed to raise rates in December — which would begin the long march back towards fiscal normalization and the incentivizing of saving once again, rather than promoting investment alone, which has been its course these past eight years. Otherwise, the Fed has no room for rate adjustment should the economy stall later in 2016 and we will be back to bond-buying stimulus as the only tool in the Fed's bag of tricks — and the Fed still has a huge bond reserve to ease back into the market at some point.
By now, a rate increase has been priced into the market, so don’t let Fed policy scare you into abandoning your balanced portfolio plans. Meanwhile, if you are looking at buying a home, it seems more likely than ever that interest rates will rise — but we've all been saying that for more than a year now. It is a good time to buy, but don't overextend yourself just to get lower interest rates. You certainly can save money long-term, but make a cost-benefit calculation first and consider scaling back the size of home that you buy if you are overextending yourself on debt. Take advantage of the low rates while they last, but do so wisely.
In short, enjoy the optimism and seize tangible opportunities, but do not overreact to one data point. Let the media handle that for you.