October Jobs Report: Strong Across the Board, FOMC Call Unchanged

We view this report as supporting our call of a December hike, with three more likely next year—though,  admittedly, September 2019 is a long way off. 

Nonfarm payrolls increased a robust 250K in October, and revisions to gains in the previous two months were offsetting. Monthly payroll gains have averaged 218K over the last three months and 203K over the last six months. Average hourly earnings increased 0.2% in October, and the 12-month change jumped to 3.1%— largely due to an October-2017 decline in average hourly earnings falling out of the 12-month window. This is further evidence that wage gains are firming as the labor market tightens. The household survey showed that there were large increases in both employment and the labor force. The participation rate increased two-tenths, and the unemployment rate remained at 3.7% in October. 

This report was unambiguously strong and broadly consistent with our September forecast (link). Although the unemployment rate held steady at 3.7% last month, the ongoing strength of employment gains strongly suggests the unemployment rate will remain on a downtrend. Indeed, we expect the unemployment rate to decline several tenths further by mid-2019. We also see this report as supporting our call that the FOMC will raise rates at every other meeting through September 2019. The recent decline in equity prices has put a  dent in household balance sheets, and all else equal would suggest somewhat slower gains in consumer spending. But growth in employment, hours, and wages are pointing to faster growth of income, providing some offset to that negative effect and reassuring FOMC participants about their policy course. 

Some on the FOMC have suggested that there is likely further scope for workers to be brought back into the labor force, in which case a stronger pace of job gains can be sustained without excessive overheating. Vice-Chairman Clarida recently made this argument, and he explicitly cited depressed levels of prime-age labor force participation (link). Readings such as this, in which strong employment gains are accompanied by increases in participation and a flat unemployment rate, might be seen as supporting this argument. Indeed,  the participation rate for prime-age males (ages 25-54) increased four-tenths in October. 

However, a longer view suggests that this dynamic is at best a mitigating factor and job gains have resulted in a tightening labor market. Over the last year, the unemployment rate has declined four-tenths and the broader U-6 measure has declined six-tenths even as the overall labor force participation rate moved sideways within a narrow band (actually up a couple of tenths) and that for prime-age males increased four-tenths. Clarida said that stronger-than-expected job growth alone wouldn’t make him favor tighter policy than otherwise unless accompanied by stronger inflation and inflation expectations. Most of his colleagues, however, will see reports like this as evidence that the labor market continues to tighten in a way that cannot be sustained indefinitely. 

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