Another Cut This Year Now Nearly Out of Reach

Powell said the FOMC would consider easing only if developments led to a “material reassessment” of the outlook. With only six weeks to go until the December meeting, that was a high bar for the limited incoming data to meet. Now, after this morning’s blockbuster jobs report, it already looks nearly out of reach. Clarida called it a “very solid labor market report” providing further evidence that the economy is “resilient” to the headwinds it is facing. He added, “We’ve done the adjustment…I would be less optimistic on the economy if  we had not made those 75 basis point adjustments.” In addition to reinforcing our call for no cut in December,  by indicating more momentum in the economy than we had thought this report gives some additional support for our baseline outlook that growth will not slow to a point over the next few quarters to an extent that another cut would be justified. 

Nonfarm payrolls increased a very solid 128K in October despite being weighed down by a couple of temporary factors: Strike activity (GM) led to a 42K decline in manufacturing employment in motor vehicles and parts,  and temporary jobs related to the 2020 Census declined 20K. Apart from the strike, manufacturing employment appears to have held up well, with gains outside motor vehicles and parts totaling 6K. On top of that, upward revisions to payroll gains in September and August totaled 95K. The recent trend looks very good even with October payrolls being suppressed by special factors. Over the last three months, payroll gains have averaged 176K (up from 157K in the last report), which is nearly the same as the average over the last 12 months. Average hourly earnings increased a modest 0.21% in October and there were slight upward revisions to September and August. The 12-month change rose a tenth, to 3.0%—still no sign of overheating. 

The results of the household survey were positive as well. The unemployment rate edged up a tenth to 3.6%,  partially reversing last month’s decline, as the participation rate increased a tenth. Over the last year, the participation rate has increased four-tenths and the unemployment rate has declined two-tenths. 

We may have a “material reassessment,” though not of the sort that would lead to Fed easing but rather of the momentum in the labor market and economy. This employment report points to higher aggregate hours worked and incomes in Q3 and bodes well for Q4. It further bolsters the narrative emphasized by Powell at his recent press conference: A strong household sector can support sustained momentum in the economy despite significant and persistent headwinds.  

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