A 50/50 proposition.

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What the October Jobs Data Means for the Fed

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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With investors neatly divided about the possibility the Federal Reserve will raise interest rates in December, the U.S. jobs report on Friday could affect both market prices and volatility.

QuickTake Monthly U.S. Jobs Report

Three data points in the October report warrant particularly close attention:

  1. Job creation: The pace of monthly job creation slowed unexpectedly in September, to 142,000, well below the 200,000 forecast in a Bloomberg survey of economists. In combination with equally surprising negative revisions to previous months, that brought the monthly average for 2015 to 198,000, compared with 260,000 for 2014.

    It is natural for the pace of monthly job creation to slow over time -- not least because the unemployment rate has been falling sharply and now stands at 5.1 percent. But it would be worrisome if the slowdown continued at the same pace as in September for many more months, which would increase questions about the underlying health of the U.S. economy, including the extent of the remaining slack in the labor market. That outcome also could force the Fed to consider difficult and uncertain trade-offs between cyclical and structural forces in its delicate December decision. 

    At the other extreme, an increase in monthly job creation to the 180,000-200,000 level would tempt the Fed to hike rates for the first time in almost 10 years when its policy-making committee convenes next month; especially if the acceleration was accompanied by favorable revisions to prior months. 

  2. Labor participation: In last month's report, the rate of civilian labor participation fell further, perpetuating a multiyear trend that is of concern for both the current and future growth potential of the economy. At 62.4 percent in September, the rate is at its lowest since October 1977. In addition, the employment-to-population ratio edged lower, to 59.2 percent.

    The Fed both desires and needs a reversal in these trends because it would indicate the healing economy is -- finally -- encouraging more people to re-enter the labor force, enhancing its production potential. A notable improvement in the participation rate also would cause the Fed to delay a rate hike because the central bank would fear the negative economic consequences of what would be a premature tightening of financial conditions.

    However, if the report for October indicates that these rates remain stuck at the prevailing low levels -- or worse, are declining even further -- the policy implications would be different: There would be heightened worry the labor market faces impediments to growth that are more structural than cyclical that couldn't be fixed by loose monetary policy alone. That, in turn, would fuel additional concerns about the collateral damage and unintended consequences of an economic policy stance that has relied too long and too heavily on unconventional monetary measures.

  3. Wage growth: Despite the job creation of the last two years and the decline in the unemployment rate, wage growth remains frustratingly sluggish. Total earnings fell in September, reflecting both a decline in the average work week (by 0.1 hours to 34.5 hours) and in average hourly earnings (down 1 cent down to $25.09).

    The Fed already seems somewhat confounded by the failure of inflation to trend up to its 2 percent target, and continuously sluggish wages would act as a disincentive to normalizing interest rates. If, however, the September declines proved both temporary and reversible, the institution's explicit dual mandate, as well as financial stability considerations, would signal the need for a hike.

It is hard to predict how these three data points will show up in the October jobs report, particularly in light of the uncertainty about the functioning of the U.S. economy and the complications caused by a fragile global economy. At the same time, it is regrettable that a single set of readings in a traditionally noisy date series potentially could have such an influence on decision making at the Fed. Yet that is where we are; and, depending what Friday’s report tells us, some sharp market moves could be in store, especially given that markets have priced a balanced 50/50 probability of an interest rate decision.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net