Despite a modest undershoot on the expected headline gain in nonfarm payrolls (the consensus forecast was looking for 313K jobs), we see the net 261K gain in jobs as evidence that the U.S. labor market is swiftly resuming its solid monthly pace of job creation. It also helps to know that there was a net upward revision in the prior two months payrolls of 90K jobs, so the overall change in nonfarm payrolls including the net revisions gets us closer to 351K jobs.
Solid job gains were seen in food service and drinking places, business services, anufacturing, and health care sectors. Leisure and hospitality payrolls increased by +106K, business services +50K, education and health care +41K, and manufacturing +24K last month.
One of the biggest surprises in the report was the drop in the U.S. unemployment rate to 4.1%. Unemployment continues to decline faster than the Fed or private sector economists have been forecasting. The unemployment rate has dropped three tenths of a percentage points since August. The drop last month seems to have been driven by people dropping out of the labor force — those classified as not in the labor force increased by 968K last month. The unemployment rate is lower than most economists, including the Fed, expected at this point in the year.
Today’s unemployment data raise the odds that the U.S. unemployment rate slips below 4.0% by early next year. This is a significant undershoot of the FOMC’s estimate of non‐accelerating inflation rate of unemployment (NAIRU) and will increase concern among some that the Fed could be somewhat behind the curve in normalizing interest rates.
With that said however, wage growth remains elusive. Average hourly earnings fell back in October, dropping 0.04%, while the year‐on‐year growth rate slipped to 2.4% from 2.8%. The mystery continues as to why we are not getting more traction in earnings given the low levels of unemployment.
Bottom line: The October jobs data confirms the rebound in the U.S. job creation engine. It is in‐line with our forecast for GDP growth remaining in the 2.5 to 3.0% range in the fourth quarter, and should help solidify the FOMC around another rate hike in December.
Market reaction so far has been muted. Treasury bond yields remain in a tight range with the 10‐Year Treasury yield unchanged at 2.345% and U.S. stocks appear to be trending water around unchanged levels as well. The U.S. dollar spot index is modestly positive up 0.1% from yesterday.
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