The October jobs report is to be taken seriously but not literally.
Once one adds the downward revision of 112,000 jobs for August and September to the 12,000 gain in October, there was a decline in total employment of 100,000 inside the report.
It will not be until early next year before we get a “clean” look at the condition of the American labor market.
We would urge investors, firm managers and policymakers not to overinterpret the temporary factors driving the top-line decline—two hurricanes and the Boeing strike—and to expect a similar dynamic in the November jobs estimate.
It will not be until early next year before we get a “clean” look at the condition of the American labor market.
The distortions were significant. The Boeing strike took 40,000 jobs from the top-line estimate, and Hurricanes Helene and Milton led to the temporary loss of an unspecified number of jobs.
Those distortions will fade over the next two months and should be interpreted as noise and not a deviation from the underlying trend in job growth that we think is near 120,000 per month.
That figure falls squarely within our estimate of the 100,000 to 150,000 jobs per month—the three-month average of total private hiring is 148,000—needed to keep employment conditions stable.
While we would agree that hiring is slowing, we would make the case that it is easing to a more sustainable pace as the economy stands at full employment.
Perhaps the better metric inside the October report is the unemployment rate, which remained steady at 4.1%, and the 0.4% increase in average hourly earnings that resulted in a 4% year-over-year increase in wages.
Those two figures are better indicators of the fundamental strength of the American labor market that is part of an overarching narrative of an economy that has expanded at a 2.7% pace over the past 12 months and is poised for further gains.
An economy at full employment amid the re-establishment of price stability is a more accurate picture than the data affected by hurricanes and a major strike.
Policy implications
The policy takeaway from the report is negligible. We think that the Federal Reserve will look past the distortions keep its eyes focused on a 25 basis-point cut to its policy rate its meeting on Nov. 7.
But the risks to the outlook with respect to jobs, growth and inflation is that the economy continues to outperform which could lead the Fed to pause its rate cuts in December. The Fed would need to ascertain if the economy will continue to grow closer to the 2.5% rate we anticipate next year or slow back toward the long run trend of 1.8%.
Market pricing of federal funds futures over the past two weeks indicates that investors are pricing in a shallower pace of rate cuts next year. Investors will need to see a slower pace of job creation to alter those expectations.
The data
The key takeaway inside the report was the large decline of 46,000 manufacturing jobs of which we think 40,000 was caused by the Boeing strike.
Second, the loss of 47,000 jobs in professional services and 4,000 in leisure and hospitality, along with the small increase of 3,000 information jobs and lack of growth in financial services, are exactly what one would anticipate following severe weather events.
Apart from those industries affected by the weather, there were 8,000 new construction jobs added in October—expect that number to temporarily soar as reconstruction across the Southeast starts—as well as a net gain of 57,000 jobs in education and health care and 40,000 in government jobs.
Read more of RSM’s insights into the economy and the middle market.
On the wage front, average hourly earnings increased by 4.1% on a three-month average annualized pace, while total private hours worked remained steady at 34.3 hours, which is surprising given the significant disruption caused by the hurricanes.
Aggregate hours worked, which is the best metric to forecast overall spending, remained steady at 116.7, which bodes well for outlays heading into the holiday spending season.
Manufacturing hours declined by 0.1 to 39.9 as hours worked inside the production complex declined by 0.3%.
The overall labor force increased by 150,000 workers and the employment-to-population ratio eased to 60% from 60.2%.
The median duration of unemployment increased to 10 weeks, which implies that those workers who lose a job will face a three to four months of unemployment before finding a new job.
Employment of prime-age workers, who are 25 to 54 years old, stands at 83.5% with 77.8% of women in that cohort employed and 89.3% of men employed.
The takeaway
The October jobs report was full of noise and hurricane-induced distortions that do not reflect the fundamental strength of the American labor market.
We think that hiring has slowed to a monthly pace of near 120,000, which is sustainable for an economy at full employment and growing at a 2.7% rate over the past 12 months.
We expect that the Federal Reserve will ignore the noisy top-line figure in October and cut its policy rate by 25 basis points when it meets next week.
