Strong U.S. Payroll Report Is A Positive Surprise

Last Friday’s payroll report was indeed a positive surprise, as nonfarm payroll increased by 271k jobs (185k expected) taking the 3-month average up to 187k from 171k in September. The breadth of cross industry hiring was robust, as measured by the 1-month private diffusion index hitting 61.8 from 53.4 in September. The service sector added the bulk of the jobs (+241k), driven by retail trade (+43.8k), professional business services (+78k), and education and health services (+57k). The goods producing industry added +27k, all in the construction sector (+31k), but with a flat reading in the manufacturing industry (+0k) and a slight drag form mining (-4k).

On the household survey side, the unemployment rate ticked down slightly to 5.0%, while the labor force participation rate went unchanged, implying a “healthy”  drop in the unemployment rate which was then driven by fewer unemployed finding jobs rather than fewer unemployed leaving the workforce. Furthermore, the employment to population rate increased slightly to 59.3. This is a positive, suggesting robust employment gains, although the employment to population ratio for the core of the workforce, aged 25-54, went unchanged at 77.2% – we’d like to see further gains here. The broadest measure of labor underutilization, the U-6 unemployment rate, which is closely followed by Chair Yellen and includes those marginally attached to the workforce and those employed only part time for economic reasons, dropped another 0.2% to 9.8%.

We finally saw some labor cost pressures this month. Average hourly earnings for all private nonfarm employees jumped 0.4% in October, bringing the annual earnings growth to 2.5%. On a 3-month average basis, average hourly earnings are growing at a pace of 2.3%, its highest trended rate since the 2009 recession. However, there are many metrics of “labor costs” in the U.S., including the  employment cost index, average hourly earnings, and the income measure wages and salaries. An average of the three is our favorite measure of “wage pressures”, which remains at subdued levels compared to its own history at 2.8% (see chart below). On balance, while we expect wage growth to continue an uptrend into next year, look for 3.5% as suggested by FOMC member Charles Evans to be consistent with a 2% medium-term inflation target. In short, we’ve got a ways to go.

In conclusion, a strong report. It does support a December rate hike, as Federal Open Market Committee members recently have pointed to job gains in the range of 150-175k to be consistent with above potential growth. In short, barring a large and negative external shock, Fed rhetoric plus this payroll report very likely puts the Fed in the position to raise its federal funds rate for the first time in over a decade next month.

Strong U.S. Payroll Report Is A Positive Surprise - Average Compensation Chart

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