An October Surprise from Jobs
How much of it do we
really believe?
Job growth in October ratcheted
down gaining only 150,000 jobs after gaining nearly twice that much at 297,000
in September. The slowdown in private jobs was more severe as September's
246,000 gain turned into 99,000 in October.
Government sector jobs led the job growth parade in October.
Markets reacted strongly to this
news that job growth was weaker in October than September knowing that it meant
that job growth was weaker in October than it was in September… And although that's all we really know,
people in markets jumped to many, many, other conclusions based on this report
that seemed to fulfill their hopes and dreams...
A month ago, the headline gain
was even stronger as it has been revised down in this report but at that time
markets did not react strongly to it because they didn't completely believe it.
Markets have continued to believe the economy is going to slow. Indeed, markets
have been looking for the Fed to pivot almost from the moment the Fed began to
hike rates. This month on news of weakness. markets are even more certain that
they're right, more certain than they were last month when the numbers showed
them that they were dead wrong, at least for a while - unequivocally wrong. The Market view is undeterred.
Job growth in the economy has
wrong-footed forecasters for quite some time… but that's not surprising after
the tremendous amount of fiscal stimulus that had been poured into this economy
on top of an enormous dose of monetary stimulus. Stimulus is in the process of being unwound
and certainly based on the current level of rates, and that level compared to
inflation, monetary policy is no longer stimulative. However, monetary policy
works with the lag and that works both after stimulus as well as after rate
hiking and we can't be sure that all the effects of the monetary stimulus have
been boiled out of the system yet. For example, in this report, construction
jobs increased by 23,000, more than the 13,000 that were created in September,
and greater than the three-month average of 22,000 per month, and greater than
the year-over-year average of 18,000 per month. So, the spike in rates and the
high mortgage rates themselves have not caused the construction sector to roll
over. People looking at this report are saying that it's evidence that the
interest rate hikes are working but when you look at the interest sensitive
sectors that doesn't seem like a provable hypothesis.
The BLS tells us that part of the
reason for the downward revision to job growth in September was because of the UAW
strike and some misclassified workers. Since the UAW contract gives a raise of
11% in the first year and more to come later as auto production gets back to
normal, we can expect to see a reduction in these headwinds. We've seen in the
last several months while the strike was going on some pretty good job growth!
Perhaps now there will even be stimulus from the greater income that workers
will have in the wake of the new contract.
I'm not terribly excited to take
this weak October job report and to run with it and call it the start of a
slowdown in the economy. It may be that, but then again it may not because this
is not the only game in town. Monthly job creation is a volatile thing; the
150,000 jobs come after a 297,000 job gain which had come after a 165,000-job
gain. Over the last three months job creation averages 204,000 pretty similar
to the 207,000 and average in the previous three months and this month's number
of 150,000 isn't really all that much weaker than the average of 204,000 for me
to jump up and down about it.
However, in the job report there
was also a reduction in hours worked. There was a rise in the unemployment rate
and there was some ongoing moderation in wage gains. But as we look ahead, we
have the UAW contract kicking in and its potential to be a bellwether for other
wage gains in the economy. The unemployment rate has risen half a percentage
point from its low and it's within 1/10 of a percentage point of triggering a
recession warning according to some of the signaling mechanisms that I'm
acquainted with.
It's true that there are several
aspects of this report that point to things slowing down but again we'd like to
see some trend rather than just one month's worth of data and particularly one
month after a very strong month. I urge
vigilance and looking at the numbers and anticipating the future we need to
make the numbers show us what's happening rather than to bet too much on
anticipation because anticipation has been so wrong in the wake of the COVID
recession. We continue to have cross currents in this economy and it's still
true that while the federal funds rate is no longer at a stimulative level it's
not at a very restrictive level either. So, when comes to braking the economy,
I don't think that interest rates are providing much braking although we could
be looking at the dissipation of the stimulus from monetary policy in the past
as well as a tailing of fiscal policy. Be open-minded about the trends we're
observing and about extrapolating them too far into future. It’s been a tough time for forecasters.
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