Jobs: A Big October Surprise
The U.S. jobs juggernaut continued to defy expectations for any marked slowdown in the October employment report released on Nov. 2, placing itself firmly in the array of economic indicators that are failing to confirm any broad slowing in the economy. There was some weakness in the factory figures this time around, and the wage figures showed some reprieve. But the construction sector outperformed expectations yet again, as did payrolls, with firmness in the workweek and steady growth in overall hours worked.
Nonfarm payrolls surged 166,000 in October, which was nearly double economists' median estimate of 85,000. September's increase was revised down slightly, to 96,000, from 110,000 previously, while August's 89,000 was revised up to 93,000 for a net -10,000 revision. The unemployment rate was steady at 4.7%. Average hourly earnings rose 0.2%, following a 0.3% gain in September (revised from 0.4%). The average workweek was flat at 33.8.
Manufacturing shed an additional 21,000 jobs. Construction employment fell only 5,000. The service sector added 190,000 jobs, with government jobs up 36,000, while financial firms added 2,000 jobs and the retail sector lost 22,000.
An Upward Revision to the Construction Spending Forecast
The data are consistent with a 0.4% October personal income gain that will leave disposable income poised for 5.4% fourth-quarter growth, following the 6.1% clip seen in the third-quarter gross domestic product report released on Oct. 31. We now project a flat October industrial production figure that is consistent with a 1.0% first-quarter growth clip, vs. the 4.0% pace in the third quarter and 3.6% rate in the second.
The 0.1% rise in the October hours-worked index leaves this aggregate poised for a 1.2% clip in the fourth quarter that repeats the rate of the third. The trajectory for hours worked remains strong relative to our assumed fourth-quarter slowing in GDP growth to a 2.0% rate from the roughly 4% rate of the past two quarters.
The tiny 5,000 drop in construction employment in October, and 0.4% surge in construction hours worked, is surprising, and has prompted an upward revision in our October construction spending forecast to 0.1%, following the surprising 0.3% gain already reported in August.
Broader Economy Shrugging Off Housing Woes
In total, the October jobs report has extended the ongoing dichotomy between actual available data, which show a resilient U.S. economy outside the housing sector, and widespread expectations that the broader economy is doomed to experience a sizable hit from credit-market turmoil.
All of which raises the question: What if Wall Street throws a panic, and nobody shows up? Recent data have largely supported the view that, outside of housing, the broader economy remains highly resistant to credit-market turmoil, with a pattern similar to the response to the Long Term Capital Management crisis of 1998, and the stock market crash of 1987. As it stands, the available data are consistent with the Fed's relatively hawkish statement following the Oct. 31 Federal Open Market Committee meeting, which suggests that if we don't get any additional evidence of weakness beyond what is currently expected, the Fed is unlikely to ease again.
Although equities have proven remarkably strong through this period of credit market turmoil, market movement may now reflect that Wall Street is "on its own" to absorb the price hit from revalued subprime loans. Declining stock prices and the dollar, and a flight to quality that is driving prices of Treasury securities higher, may well reflect expected weakness in financial portfolios rather than an expected marked slowing in aggregate economic growth. The market will need to remain open to the possibility that the hit to the ex-housing economy from credit-market turmoil may prove much smaller than widely expected, as with many prior periods of financial market crisis.