U.S. hiring accelerated in October on the back of two strong quarters of corporate profits and a third-quarter growth rate of 3.4%. The economy added 165,000 jobs on the month, which reduced the unemployment rate to 4.1%.
Wages increased by 0.4% in October, which translated to a 3.1% yearly advance. While that figure implies a decline in inflation-adjusted wages, it also shows that wages are not an inflation problem at this time.
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Employment among people in their prime working years of 25 to 54 stood at 83.7%, just below the cyclical peak of 84%.
Following the summer slowdown in hiring, top-line growth and the net upward revision in hiring of 84,000 resulted in a three-month trend of 137,000 jobs gained per month and a six-month average of 83,000. That last figure is a better reflection of the underlying trend in hiring rather than the top-line initial estimate by the Bureau of Labor Statistics.
The policy takeaway from the jobs report is that the Federal Reserve will move confidently toward the December rate hike of 25 basis points as the economic expansion steams ahead.
In our estimation the expansion is mid-cycle, with a better hiring environment at hand.
Given that the economy needs to generate only 35,000 jobs per month to keep labor market conditions stable, the strong month of hiring resulted in a decline in the unemployment rate to 4.14%, which more than meets anyone’s definition of full employment.
Professional business services leads the way
The increase in hiring was driven by a gain of 70,000 jobs in professional business services, 53,000 in private education and healthcare, 22,000 in trade and transport, 15,000 in goods production and 19,000 in manufacturing.
Retail trade increased by 6,000.
Leisure and hospitality shed 13,000 jobs; the construction industry lost 3,000 positions and the information sector declined by 1,000.
Wages increased at a 3.2% average annualized pace while the median duration of unemployment increased to 11.9 weeks. Both the participation rate, at 61.9%, and the employment-to-population ratio, at 59.3%, improved by 0.1% on the month.
Expect the Fed to raise rates
The best characterization of the labor market is one of modest and sustainable hiring amid full employment.
There was nothing in the monthly report that implies the Fed will deviate from its expected December rate hike.
Inflation-adjusted wage growth declined for the seventh consecutive month. The American public will continue to look skeptically at the expansion, which is skewed toward upper-end households and businesses that are profiting from strong underlying demand and the AI build-out.
While financial markets have gyrated in recent days over a possible slowdown in AI investment, we do not think that growth will slow below the long-run trend of 1.8%.
We expect growth to close the year near 2.5% and expect it to slow next year to a range between 2.2% to 2.5%. There is a 15% probability of a recession over the next 12 months despite the current financial tumult and repricing of risk around AI.
