October Jobs Data Dispel the Gloom

Sharp upward revisions for August and September, plus other signals of strength, make it seem less likely that the economy will hit a wall

After a run of weak economic numbers in late October and early November, many market watchers expressed fears about rapidly cooling U.S. growth. Those fears appear to have been brought up short by the government's employment report for October, released on Nov. 3.

While the headline nonfarm payrolls figure—job growth of 92,000 on the month, well below economists' median forecast of 125,000—looked lackluster, massive revisions to payrolls in the two prior months showed continued strength in the labor market: September job growth was nearly tripled, to 148,000 from the 51,000 previously reported, and August payrolls were revised to a gain of 230,000 from 188,000.

Indeed, the news of sizable upward revisions to August and September payrolls, alongside soaring wages, a rising workweek, and a robust civilian employment up-trend, all suggest that the market's concerns about a sluggish fourth quarter for the U.S. economy were overblown.

Higher Forecasts

Given that the release of the preliminary benchmark revision last month suggests an undercounting bias has affected the payroll survey since April, 2005, the market will focus on the strength in the rest of the report. It turns out these other employment measures were mostly downright robust.

The unemployment rate dropped to a new cyclical low of 4.4% from 4.6% in September, with the household employment measure measures surging by 437,000. The average workweek improved to 33.9 hours from 33.8. Meanwhile, average hourly earnings rose 0.4% after small upward bumps in August and September, which left earnings growth at 3.9% on a year-over-year basis from 4.1% in September.

As for industry payroll growth, weakness was led by a 39,000 drop in manufacturing, a 26,000 decline in construction, and a 4,000 decrease in retail. Most of the other industries revealed solid growth, with a 15,000 gain in temp hiring particularly encouraging.

The data have boosted our forecasts for a slew of reports for October set to be released later in the month. We now expect a healthy 0.6% gain in personal income, a 0.3% gain in industrial production, and a 0.2% gain in retail sales.

Market Fears

There is also a chance that construction spending will come in above our -0.1% forecast, given the big jump in hours worked. The data also set a solid trajectory for fourth-quarter hours worked, which supports the rebound above 3% we project for fourth-quarter gross domestic product.

In total, the strength in the payroll, workweek, wage, and civilian employment figures through October are at odds with market fears of a sharper slowdown in the broad U.S. economy. This is true despite the adjustment under way in the housing and auto sectors, which are proving to be contained.

We continue to believe that GDP growth will bounce to the 3.3% range in the fourth quarter following the lull in the second and third quarters, leaving a modest slowing in trend growth for the economy from the 3.7% area through the end of last year, to the 3.2% area now. This slowdown is in line with the normal moderation in the growth during the later years of an expansion, but nowhere near the sharp deceleration that the markets feared following the lean GDP growth rate of 1.6% for the third quarter.

Such a slowdown, combined with the steady tightening in labor market overall, and up-trend in wages, should keep the Federal Reserve positioned between the current pause and a risk of tightening—rather than the balance between a pause and easing perceived by many market players.

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