Economics Web Note


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Lights on for job growth; wages still in the dark

 
 
The October employment report was solid. Employment increased by 171,000 last month and there were upward revisions totaling 84,000 for the prior two months. The private-sector added 184,000 jobs in a broad-based manner; the diffusion index indicates that almost 61% of the 266 private industries increased employment last month, the highest reading since May. The unemployment rate did tick up to 7.9%, but in the context of a two-tenths rise in the participation rate to 63.8% this should not be held against this report. The employment-to-population ratio, which is a function of the unemployment and participation rates, rose another tenth to an expansion-high 58.8%. The only fly in the ointment is the growth in labor income. Average hourly earnings were flat last month, and on a year-ago basis hit fresh all-time lows, whether looking at the production worker series (1.1%) or the all-employee series (1.6%). The workweek was also flat last month and total labor income is growing, at best, at an average annual pace of 2.4%. This pace of labor income growth may be quite acceptable for corporate profits, but it does pose headwinds for consumer spending growth. For the overall pace of economic growth, this report doesn't do much to change our view that we continue to expand at around a 2% pace, but it does help dissipate some concerns raised by the softer capital spending figures. Similarly for the FOMC we do not see this changing their policy deliberations -- the better readings on broad labor utilization will be weighed against the downside inflation risks posed by the soft wage data.
 
The establishment report presented two dissimilar snapshots of the October labor market, depending on whether you looked at the employment data, or you looked at the hours and earnings data. The employment data was very respectable. Private service-providing industries added 163,000 jobs last month, the most since February. Within goods-producing industries, manufacturing increased employment by 13,000 last month, reversing a two-month slide, and construction employment jumped by 17,000, the most since January. After a three-month run when job growth averaged 32,000 per month, the government sector returned to shedding jobs last month, as employment there slipped 13,000. Turning to the hours and earnings data, the message is more subdued. Last month's increase in the workweek was revised away, and average hourly earnings rounded to flat (-0.04%), leaving labor income expanding at a modest 2.4% annual pace early in the fourth quarter. There are two reasons to think labor income growth may be even softer than this. First, the workweek for both goods- and service-producing industries declined, indicated that only rounding prevented the overall workweek from going down. Second, the better-measured production and supervisory worker series saw downticks in both the workweek and in average hourly earnings, and the measure of labor income in that series is only growing at a 1.8% three-month annual average pace.
 
Compared to the prior month, the household survey in October was much more straightforward. The household measure of employment increased 410,000, and has increased faster than the establishment measure over the past two months (after doing worse the prior two months, and better for the two months prior to that, etc.). Unemployment rose 170,000, which pushed the unemployment rate back up to 7.9%. There were two positive developments behind the headline number, though. First, as mentioned earlier, labor supply is picking up, as the participation rate rose to 63.8%, and has now reversed the slide that occurred in July and August. It may be too soon to say that we've turned the corner on the rapid slide in participation, but recent developments are encouraging. The other favorable development was the partial reversal of September's big increase in the number working part-time for economic reasons. Because of this, the closely-watched U-6 measure of underemployment ticked down to 14.6% and is back down to levels seen earlier this spring.
 
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