Key Points
- The October jobs report was, on balance, a strong one.
- Weather may have dented the headline number, but the prior months’ revisions were strong.
- Wages are accelerating (via every measure), lending credence to the consensus of a December rate hike.
Given election-related distractions this week, today’s report will be chart-heavy and word-light; but on an important topic. Last Friday’s jobs report garnered much attention given its proximity to the next Federal Reserve meeting. But it’s not the only report preceding the December Fed meeting—there is one more in December (incorporating November’s data).
Remember, the Fed operates with a dual mandate, including not only full employment but also price stability—the latter defined as the Fed’s 2% inflation target. The connection between the two mandates is often bridged by wages, which I’ll highlight below as well.
Details were mostly stronger
In the aggregate, Friday’s jobs report was fairly strong; with an October headline payrolls gain of 161k underperforming the consensus expectation of 173k; but the details coming in stronger. On the positive side were revisions of 44k to the prior two months’ data. Payroll gains have averaged 181k for far this year—down from 229k in 2015, but still healthy. Caveat: we are in a more mature phase of the economic expansion, so payroll growth is expected to continue to slow. Below you can see a three-month moving average of payrolls, which remain fairly strong.
Source: Bureau of Labor Statistics, FactSet, as of October 31, 2016.
The unemployment rate fell 0.1 point to 4.9% (see chart below), which was in line with forecasts—although here some of the details were weaker as the participation rate dropped one-tenth and the household survey employment series fell by 43k.
Source: Bureau of Labor Statistics, FactSet, as of October 31, 2016.
There were two pieces of good news associated with the unemployment rate:
- The broader “U-6” series fell 0.2 points, as you can see in the chart above. (The U-6 includes discouraged/marginally-attached workers and those working part-time purely for economic reasons.)
- And although labor force participation dropped overall, it did increase for prime-working age folks, as seen below.
Source: Bureau of Labor Statistics, FactSet, as of October 31, 2016.
Employment of Millennials increased 3.7% year-over-year in October—significantly stronger than the payroll employment ex-Millennials of 1.2% year-over year.
Claims near 43-year low
Remaining extremely strong has been the trend in initial unemployment claims, which continue to hover near a 43-year low, as seen below. Remember, claims are a leading economic indicator and have consistently risen markedly in advance of economic downturns; i.e., not a problem presently.
Source: Bureau of Labor Statistics, FactSet, as of October 28, 2016.
One area to watch is job openings alongside the rate of hires. The well-watched data associated with the Job Openings and Labor Turnover Survey (JOLTS) shows that job openings remain high—but have come off the boil—while the rate of hires has been flat for about two years. This gap actually reflects a skills mismatch—with increasingly large numbers of companies citing skilled labor shortages. (We’ll be closely eyeing the next JOLTS data release, out tomorrow.)
Source: Bureau of Labor Statistics, FactSet, as of August 31, 2016. Job Openings and Labor Turnover Survey (JOLTS) is a monthly survey of private nonfarm establishments and local government entities which provides information on total number of job openings, hires, and separations (voluntary quits and layoffs/discharges).
What Atlanta knows
Average hourly earnings (AHEs)—the most common measure of wages—increased 0.4% month-over-month in October and accelerated to 2.8% year-over-year. That is up from 2.3% on average in 2015, and 2.1% in 2014.
Source: Bureau of Labor Statistics, FactSet, as of October 31, 2016.
There is a separate measure of wage growth I track even more closely, constructed by the Atlanta Fed (seen in the chart below). The concern about AHEs can be best illustrated by looking at the trend of wage growth during the “great recession” (see above). The “fact” that wages appeared to increase significantly during that period should jump off the page at readers. Were wages really going up that sharply during the worst economic downturn in a generation? Not really.
What happened was there was a bias in the massive job losses during that era toward lower-wage jobs. When you have an aggregation of wages for the full pool of workers, and then you begin eliminating many of the lower numbers in that aggregation, the average goes up. The opposite has occurred more recently. Wages for workers being added back into the aggregate have been on the lower end of the spectrum, thereby keeping the average down.
Enter the Atlanta Fed’s Wage Tracker measure, seen below.
Source: Federal Reserve Bank of Atlanta, as of September 30, 2016.
The concept here is akin to the “same store sales” measure retailers use to track sales exclusive of new store openings. What the Atlanta Fed has done is look at the pool of workers who have been employed for the full measurement period—eliminating the “mix shift” problem highlighted above. As you can see, wage growth using this enhanced measurement is running a full percentage point higher than AHEs.
Ready, set, go Fed
This higher wage growth has been a factor in the rising inflation pressures building in the economy; and why we remain in the camp that believes a December rate hike is in the cards—and is justified by the data.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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© Charles Schwab
© Charles Schwab
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