Even after a sharp increase in the Federal Reserve’s policy rate over the past 10 months, an inversion of the yield curve and a significant dislocation in equity and fixed-income markets, there is scant evidence of any slack in the American jobs market.
The jobs report for October did not alter that fundamental fact as total employment increased by 261,000 jobs, which brought the total gain in employment this year to 4 million positions.
The labor market has generated roughly 289,000 jobs per month over the past 90 days, according to Labor Department data released on Friday.
Even though we expect downward revisions to the top-line number in subsequent estimates, the net increase in total employment was robust and does not imply any real cracks in the labor market.
Because of fundamentally altered demographics, the American economy needs to generate only about 65,000 jobs per month to meet demand from new entrants into the labor market.
Any notion that monetary policy is going to change in the near term needs to be put to rest as the Fed will most likely have to wait until late next year or early 2024 before considering any meaningful alteration in its policy.
To bring inflation down to a tolerable level near 3%, the unemployment rate will need to increase to 4.6% and the economy will need to shed more than 1.7 million jobs.
But under current conditions, those numbers are not going to be reached anytime soon, so the policy rate will need to be increased and maintained above 5% until an overheated labor market eases considerably.
That will almost certainly require the central banks to create the conditions for a recession that we expect to begin during the first half of next year.
The data
The unemployment rate increased to 3.7% in October because of a decline in the labor force of 328,000 participants and a decrease to 62.2% in the labor force participation rate.
Although the change appears quite large, it is not statistically significant. For that to be the case, the change must be around 500,000, so this estimate is going to be subject to revision.
Total private employment increased by 233,000 jobs, which was driven by a net gain of 200,000 jobs in the private service sector. Higher-paying goods-producing jobs increased by 33,000, while manufacturing jobs expanded by 32,000.
The construction sector increased by 1,000 jobs on the month. In the near term, one would expect a net gain in construction jobs following Hurricane Ian in Florida. But given the fact that the housing ecosystem is experiencing a correction, one should expect a decline in construction jobs in the near term.
In the service sector, gains were driven by the 79,000 additional health and education jobs, 39,000 in business services and 35,000 in leisure and hospitality.
There were 12,000 temporary workers added in October, 7,000 retail and trade workers, 4,000 information workers and 3,000 financial professionals. Government workers increased by 28,000.
On a three-month average annualized pace, average hourly earnings increased by 4.4%, down from 4.8% in September, which should ease fears among policymakers of a wage-price spiral.
Aggregate hours worked increased to 113.4, down from 113.2 previously, while increasing by 0.2% monthly.
The median duration of unemployment declined to 8.1 weeks from 8.3 weeks previously. The employment-to-population ratio declined to 60% from 60.1%.
In a special statement by the Bureau of Labor Statistics, the agency said that Hurricane Ian had no discernable effect on national employment.
The takeaway
Robust labor market gains continue to underscore a tight labor market even as the economy decelerates toward recession. Since the economy needs to generate only about 65,000 jobs per month to meet basic demand, gains near current levels will not slow the economy sufficiently to generate an easing in inflation commensurate with the Federal Reserve’s goals.
For this reason, the policy rate will need to be lifted above 5% in the near term, which will create a net tightening of financial conditions, lead to further stress in the housing industry and raise the cost of doing business for American firms.
