U.S. Weekly Economic Roundup: Solid As A Rock

The Bureau of Labor Statistics (BLS) reported that October was yet another month of solid job gains. Nonfarm payrolls rose 214,000, and the unemployment rate fell to 5.8% from 5.9% the previous month. Although it was great to see more folks coming back to the labor force and even more getting employed, the missing wage increase leaves wanting for more. As the labor market’s underutilization of time and workers lessens, it is only a matter of time before the bargaining power of wages will shift to the workers.

  • The U.S. trade deficit widened to $43 billion in September from a revised $40 billion (was $40.1 billion) in August.
  • The Institute for Supply Management (ISM) manufacturing index rose to 59 in October from 56.6 in September.
  • The ISM nonmanufacturing index fell to 57.1 in October from 58.6 in September.
  • Construction spending fell by 0.4% to a seasonally adjusted annual rate of $950.9 billion in September from the revised August estimate of $955.2 billion.
  • Factory orders fell by 0.6% in September after falling by 10.1% in August.
  • The ADP private payroll employment increased by 230,000 in October, following an upwardly revised 225,000 gain in jobs (was 213,000) in September.
  • Nonfarm payroll employment increased by 214,000 jobs in October after jumping by an upwardly revised 256,000 (was 248,000) in September.
  • Initial jobless claims fell to 278,000 in the week ended Nov. 1 from the previous week’s upwardly revised level of 288,000 (was 287,000). Continuing claims fell to 2.348 million in the week ended Oct. 25.

Solid But Wanting On Wages

We have seen plenty of evidence of an improving jobs market in the past few months. October was no different. The claims of unemployment insurance fell to their lowest level since 1974, and when adjusted for growth in working age population (ages 15-64), the four-month moving average for claims has dropped to its lowest levels in history. Add to that the recent purchasing manager surveys reporting solid growth in activity and hiring, and the alternative jobs report produced by payrolls processor ADP that showed the private sector added 230,000 new jobs in October, and markets were expecting another healthy monthly jobs gain report from the BLS.

However, the BLS didn’t come out with as spectacular an employment report as the markets were expecting–but it was still solid. The BLS reported that 214,000 jobs were added in October (according to the establishment survey), below the consensus expectation of 240,000. October’s jobs gain follows a 256,000 gain in September (revised up from 248,000) and a 203,000 gain in August (revised up from 180,000). With the revisions, employment gains in August and September combined were 31,000 more than previously reported, and year-to-date average monthly employment growth is 229,000–higher than the monthly average of 194,000 for 2013.

Led by food services and drinking places, retail trade, and health care, the gains were across all industries except the information sector. The bias toward lower-paid jobs creation still exists. The leisure and hospitality sector gained 52,000 employees–nearly one-quarter of all the jobs. This is consistent with the trend we have seen over the past year (the sector generated 319,200 jobs over the past year). Professional and business services contributed 37,000 jobs this month, continuing this sector’s recent strength. Of these, 15,100 came from temporary help services firms. Looking at the glass half full, these gains can be interpreted as signs that businesses need manpower now and in the future.

In October, the unemployment rate (which is drawn from a survey of households) fell to 5.8% from 5.9% the month before. And for good reasons–more people joined the labor force (+416,000) and a lot more people got employed (+683,000). One caveat is that an unusually large share of labor-force growth came from the 16 to 19-year-old cohort. Some of this gain could be reflecting survey noise. With the healthy increase in the number of employed people, the employment-to-population ratio ticked up to 59.2% in October from 59% in September. The labor-force participation rate held steady at 62.8%.

With the steady improvement in the unemployment rate and increases in payroll jobs, gains in wages are starting to get more attention. After all, the issue isn’t about the number of jobs anymore, but about the quality of jobs. Average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.57 and are up only 2% over the year. During this recovery, wages are increasing only 2% annually on average, and that does not give much purchasing power to consumers, let alone push the economy into overdrive. Given the high level of labor underutilization in the economy (the U-6 measure of the unemployment rate was 11.5% in October, compared with below 9% before the recession) and that job creation is skewed toward low-wage industries, it’s no surprise that wages are stuck. Real wages did tick up a bit in October, but that was all because of the fall in consumer price index inflation (led by energy prices) during the month.

The index of aggregate weekly hours worked grew by 0.5% month over month in October, a welcome improvement after being stuck at a 0.2% gain for each of the past five months. In the bellweather goods sector, hours worked gained 0.3%, with component gains of 0.1% for factories, 0.7% for construction, and 1.2% for mining. The increase in hours worked suggests to us that businesses are using more of their time to meet demand of their goods and services. This is also an encouraging sign that businesses will have to hire more people in the future to keep up with the potential increase in demand.

The continued decline in the unemployment rate increases the odds of getting to the natural rate of unemployment sooner. The Federal Reserve must also have confidence that labor compensation is rising before it raises the Fed funds interest rate, especially when inflation pressures are muted. As the labor market’s underutilization of time and workers lessens, it is only a matter of time before the bargaining power of wages will shift to the workers.

We expect the first Fed funds rate hike to come in June of 2015.

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