Solid Jobs Report Will Keep Fed in Pause Mode

Nov 01, 2019
Job Fair

The October jobs report handily beat expectations and will buttress the Fed’s case for  pausing rate cuts for the time being.  Job gains totaled 128,000 in October easily surpassing the 85,000 Bloomberg consensus. In addition, the 48,000 striking GM workers impacted the manufacturing totals which reported a loss of 36,000 jobs versus 55,000 expected job losses. The strike ended late in the month so those workers will be added back in November meaning the October job gains are actually better than they first appear. Also, wages rebounded to a 0.2% gain after a disappointing unchanged reading in September.  The year-over-year gain, however, was unchanged at 3.0%.  Wage gains seem to be stuck around 3.0% after hitting 3.4% earlier in the year. Finally, the unemployment rate ticked up to 3.6% after hitting a cycle low of 3.5% last month.  In summary, the better-than-expected job  growth, upward revisions to past months, combined with only grudging wage gains will allow the Fed to keep to its planned pause in rate cuts into 2020.

 

 

  • For the month, 128,000 jobs were created versus an 85,000 forecast. The October number, however, is a sequential decline versus September’s 180,000 gain (revised materially higher from 136,000). In fact, the prior two months’ were revised up by 95,000 jobs which paints a picture of a moderately stronger jobs market in the last couple months than was previously thought.
  • Wages were better than September’s disappointment but not great either.  Average hourly earnings were up 0.2% missing the 0.3% forecast, while year-over-year earnings rose were unchanged at 3.0%.  YoY wage gains appear to be plateauing around 3.0% to 3.2% versus moving materially higher as was the case earlier in the year.   February’s 3.4% YoY gain remains the  high for this cycle and with the slowing in job gains that February print could be the high for this cycle. That pales in comparison to the 4.0+% YoY gains in expansions past. That means demand-pull inflation is unlikely to accelerate and that should keep inflation docile and the Fed on the sidelines.
  • After dropping two-tenths to 3.5% in September the unemployment rate ticked up a tenth to 3.6%(actually 3.562% vs. 3.517% in September) but the change was hardly material.  The Household Survey—which is used to generate the various employment ratios— saw 86,000 persons enter the ranks of the unemployed (5.855 million versus 5.769million) while 325,000 persons were added to the labor force denominator (164,364 million vs. 164,039 million). Much of the bump in unemployed came as a result of the 48,000 GM strikers and those workers will be back in the ranks of the employed in November, so the Fed will be unconcerned with the ever-so-slight unemployment rate increase.
  • The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached) ticked up as well to 7.0% after dipping to a cycle low of 6.9% in September.   As mentioned, unemployed persons increased by 86,000 while part-time workers increased by 88,000 but 70,000 and were subtracted from the marginally attached (those willing to work but not actively looking). The slight upward move in unemployment rates, after hitting cycle lows last month, won’t trouble the Fed.
  • The labor force participation rate (labor force divided by civilian population) increased to 63.3% after rising two-tenths to 63.2% in September.   The increase this month was driven by the 325,000 person increase in the labor force while the civilian population rose by 207,000 persons. While the current rate is a new cycle high, it pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.3% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.

In summary, the expected decline in manufacturing jobs—exacerbated by the GM strike—wasn’t as bad as forecast, while the services sector continued to add jobs in the mid-150,000 range. The better-than-expected job  growth, upward revisions to past months, combined with only grudging wage gains will allow the Fed to keep to its planned pause in rate cuts into 2020.

 

 


line graph icon  Powell’s Favorite Wage Indicators Stutter Some

With the Fed moving to a pausing mode, Chairman Powell made it clear the Fed wouldn’t be tightening anytime soon, or at least until inflation moves through 2% with some momentum. One thing that would drive that inflation would be accelerating wage gains that, in turn, fuel  increased consumer spending. That might be hard to accomplish as the graph illustrates three of Powell’s favorite wage growth indicators.  All three are below 3% YoY, or declining from recent highs. That trend doesn’t bode well for accelerating spending.

Wage Indicators

 

 


bar graph iconMarket Rates

Treasury Curve Today Chg Last Wk. LIBOR Rates Today Chg Last Wk. FF/Prime Rate Swap Rates Rate
3 Month 1.52%  -0.12% 1 Mo LIBOR 1.78%  -0.02% FF Target Rate 1.50%-1.75% 3 Year 1.534%
6 Month 1.55%  -0.09% 3 Mo LIBOR 1.91%  -0.02% Prime Rate 4.75% 5 Year 1.507%
2 Year 1.56%  -0.06% 6 Mo LIBOR 1.93%  -0.01% IOER 1.55% 10 Year 1.618%
10 Year 1.71%  -0.09% 12 MO LIBOR 1.98%  -0.02% SOFR 1.76%    

 

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