October Employment Report: Steady as She Goes

This report won’t meaningfully change the FOMC’s assessment of the condition of the labor market:  Notwithstanding disruption from the hurricanes, jobs have been added at a pace sufficient to continue lowering the unemployment rate. It also doesn’t suggest that a substantial pickup in activity is occurring that the FOMC should be concerned about. We see the data as consistent with an 80% probability of a hike in  December. 

Payrolls advanced 261K in October, well below the consensus expectation as well as our own. However,  taking into account upward revisions to previous months that totaled 90K, the level of payroll employment was about as we’d expected. Employment in food services and drinking places rebounded, largely reversing the September decline caused by the hurricanes. The three- and six-month average monthly changes in payrolls are both close to 160K, and that seems to be about what the underlying pace of gains is right now. 

In the household survey, the unemployment rate declined another tenth, to 4.1% in October, as the participation rate fell four-tenths. We’d expected the unemployment rate to edge up a tenth and partially reverse the two-tenths decline in September, but we don’t read too much into these last couple of months of data. The story is that the participation rate has been moving sideways within a fairly narrow range and is just about where it was a year ago and the unemployment rate has been declining on strong employment growth. The broader U-6 rate declined four-tenths in October and has declined by over twice as much as the  U-3 unemployment rate over the last year, reinforcing that the labor market has improved substantially. 

As for wages, average hourly earnings were flat in October following a 0.5% increase in September, and the  12-month change fell to 2.4%, erasing any sign of a recent acceleration in wages by this measure. We were hesitant to read much into last month’s stronger average hourly earnings data, and we likewise don’t read too much into this month’s softer data. We prefer the ECI for total compensation, which indicates some modest acceleration, the year-over-year figure having edged up a tenth to 2.5% in September. We expect some firming in wages over the next couple of years, but the pace of wage gains to this point doesn’t seem especially weak, given low inflation and productivity.

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