Orlando's Outlook: Not a game changer

11-04-2016

Bottom line This morning’s labor-market report for October, the last major economic data point released before Tuesday’s historically ugly presidential election, was weaker than expected. Nonfarm and private payroll growth disappointed, manufacturing and retail hiring and the household employment survey all posted outright job losses, and the labor force participation rate slipped.

But the report wasn’t a disaster, as the Labor Department also revised August and September payrolls higher, the unemployment (U-3) and labor-impairment (U-6) rates both declined, and wage growth rose on a year-over-year (y/y) basis to the highest level since 2009.

With no smoking gun, we see no reason to change our forecast that the Federal Reserve will hike interest rates at its Dec. 14 policy-setting meeting. In addition, presidential candidates Donald Trump and Hillary Clinton each have plenty of partisan talking points to glean from today’s jobs report for their stump speeches heading into the frenzied home stretch.

Another disappointing October jobs report, with nonfarm payrolls expanding by a weaker-than-expected 161,000 jobs, below the Bloomberg consensus of 173,000 and our own more conservative 168,000 forecast here at Federated. But the Bureau of Labor Statistics (BLS) revised August and September up by a combined 44,000 jobs. August’s preliminary increase of 151,000 jobs, which was revised up to a gain of 167,000 jobs last month, was revised up again this morning to a final gain of 176,000 jobs. September’s preliminary gain of 156,000 jobs was revised up sharply to a gain of 191,000 jobs this morning. But that three-month average of 176,000 new jobs is nearly one-third slower than the average gain of 261,500 jobs during June and July, so the pace of job creation is clearly slowing.

Private payrolls also soft, adding 142,000 jobs in October, below the Bloomberg consensus at 170,000. The BLS revised August and September modestly higher by a combined 9,000 jobs. August’s preliminary gain of 126,000 jobs, which was revised up last month to an increase of 144,000 jobs, was revised back down this morning to a final gain of 132,000. September’s preliminary gain of 167,000 jobs was revised up this morning to a gain of 188,000 jobs. But the three-month average from August through October of 154,000 jobs is similarly one-third slower than the June-July average of 229,500 new jobs.

Government hiring remains strong, as the difference between private and nonfarm payrolls collectively added 19,000 federal, state and local government jobs in October. That compares with upwardly revised gains of 3,000 jobs in September (versus a preliminary loss of 11,000 jobs), 44,000 jobs in August (up from a preliminary addition of 23,000), 31,000 in July, 33,000 in June and 25,000 in May. In October, the feds added 12,000 jobs, local government hiring rose by 4,000 jobs and state hiring added 3,000 jobs.

Household employment survey falls off a cliff, as the admittedly volatile household survey plunged by 43,000 jobs in October, down sharply for the first time in six months from the addition of 354,000 jobs in September and 97,000 new jobs in August. Household employment had also risen by 420,000 jobs in July, 67,000 jobs in June and 26,000 jobs in May. The household survey is a leading indicator for nonfarm and private payrolls, so this weaker October reading raises questions about November, and it also serves as the basis for the unemployment rate.

Participation, unemployment and labor-impairment rates follow suit, with the civilian labor force declining by 195,000 workers in October, a stunningly sharp reversal from the addition of 444,000 workers in September. That compares with the addition of 176,000 workers in August, 407,000 workers in July and 414,000 in June, versus losses of 458,000 employees in May and 362,000 in April. The unemployment rate, calculated from the household survey, ticked down to 4.9% in October from 5% in September, after three-consecutive months at 4.9% through August. It had hit a cycle low at 4.7% in May, the lowest level since November 2007. The labor-force participation rate also ticked down to 62.8% in October from 62.9% in September, after two-consecutive months at 62.8% in July and August. That’s below the two-year high of 63% in March, but still above the 38-year cycle low of 62.4% in October 2014. The labor-impairment rate—known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—fell to 9.5% in October. That is a new eight-year cycle low, after three-consecutive months at 9.7% through September.

Wage growth improves, while hours worked was flat, as hourly wages rose 0.4% on a month-over-month basis in October, a tick better than both consensus expectations and September’s upwardly revised gain of 0.3%. August wages grew only 0.1%. That translates into a y/y increase of 2.8% in October, the most since 2009, compared with an upwardly revised increase of 2.7% in September. The average private work week for all employees remained steady for the second-consecutive month at 34.4 hours in October, versus a two-year low at 34.3 hours in August. Each additional 0.1 hour worked is the equivalent of adding an estimated 350,000 jobs to the economy.

Manufacturing negative, construction positive, with the former losing 9,000 jobs in October for the third-consecutive month, versus 8,000 lost jobs in September and 16,000 in August. The ISM manufacturing index had slipped into contraction territory below 50 in August, but rebounded back above 50 in both September and October. Construction gained 11,000 jobs in October for the second-consecutive month, after adding 23,000 new jobs in September, reversing the loss of 6,000 jobs in August. Construction had added 16,000 jobs in July, but lost 6,000 jobs in June, 18,000 in May and 6,000 in April.

Retail loses jobs due to a weak Back-to-School (BTS) season and expectations for a similarly muted holiday season, the retail sector shed 1,000 jobs in October, after adding 22,000 new jobs in September, 17,000 in August, 13,000 in July and 22,000 in June.

Temps still positive, with a gain of 6,000 new jobs in October after adding 31,000 new jobs in September, as the retail and the transportation shipping companies (such as UPS and FedEx) staffed up for holiday. An important leading indicator of employment growth, temps had lost 3,000 jobs in August, after adding 16,000 jobs in each of June and July.

Leisure remains slow, as this economically sensitive category added only 10,000 new jobs in October, compared with downwardly revised gains of 7,000 new jobs in September and 10,000 in August. The pace of leisure hiring has clearly slowed, looking at 31,000 new hires in July and the robust addition of 53,000 new jobs in June.

Education and health accelerated, with these bedrock categories adding 52,000 new jobs in October, 39,000 in September, 56,000 in August, 42,000 in July, 52,000 in June, 46,000 in May, 47,000 in April and 46,000 in March.

ADP weaker than expected, as the ADP National Employment Report, a forward-looking proxy for private payroll growth, reported a much softer-than-expected 147,000 new jobs in October (consensus at 165,000), significantly less than the 202,000 additions in September (revised sharply higher from 154,000) and the lowest private reading in five months. In October, small firms with fewer than 50 employees added 34,000 jobs (23% of total, compared to September’s upwardly revised 54,000, or 27% of total); midsized companies with between 50 and 500 employees added 48,000 (33% of total, less than September’s upwardly revised 80,000, or 40%); and larger companies with more than 500 employees added 64,000 hires (44% of total, compared to September’s upwardly revised 69,000, or 34%). The decline in total jobs and the reduced percentage of jobs coming from small- and mid-sized companies mirrored the weaker-than-consensus payroll increases in today’s report. 

Jobless claims hit new record low, as Initial weekly jobless claims, a leading economic and employment indicator, saw 246,000 people filing for unemployment insurance for the week ended Oct. 1, which is a new 43-year cycle low. The crucial October jobs report’s survey-week revised reading of 261,000 for the week ended Oct. 15 was only marginally higher. Just as significant, continuing claims came in at a record low of 2.026 million for the week ended Oct. 22, highlighting the strength in the labor market, which is finally leading to the wage gains we saw in today’s payroll report.

JOLTS softer, as the Job Openings and Labor Turnover Survey (JOLTS), which measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends, plunged 6.6% to a much weaker-than-expected 5.443 million jobs in August (the most recent data available) from a downwardly revised 5.831 million in July. While that is the largest monthly decline in a year (August 2015), JOLTS has been elevated recently and this decline may be more of a return to typical levels in relation to the payroll report. The hiring and quits rates remained at 3.6% and 2.1%, respectively, and the separations rate ticked down to 3.4% from 3.5%.

Layoffs plunge, says the Challenger Job-Cut Report. It announced layoffs in October of only 30,740, a decline of 31% from 44,000 layoffs in September and a 39% decline from layoff levels of a year ago.

Congratulation to our friends who are Chicago Cub fans on vanquishing a 108-year-old curse to win the World Series!

To see Phil Orlando’s thinking in action, click here.