Orlando's Outlook: Jobs report doesn't move election needle
Bottom Line In its final employment report before next week’s presidential election on November 6, the Bureau of Labor Statistics (BLS) reported this morning that both nonfarm and private payrolls in October were stronger than expected, with solid upward revisions for both September and August. There was more good news with positive employment trends in manufacturing, construction, the household survey, and temporary help. But other important components of this jobs report were a mixed bag, with a decline in government hiring, no growth in either wages or hours worked, and a tick up in the rate of unemployment—although we would argue that this latter increase occurred for the right reasons, which are improvements in the labor-force participation rate and a decline in discouraged workers. While today’s report provides us with increased confidence that the labor market continues to heal at a moderate pace and that economy is growing slowly, it fails to provide a decisive “smoking gun” for undecided voters.
Political implications The unemployment rate when President Obama took office in January 2009 was at 7.8%, and today that rate stands virtually unchanged at 7.9%. In between, however, unemployment had been stuck above 8.0% for 43 consecutive months since February 2009 through August 2012, marking the longest such stretch of joblessness since the government starting collecting data on this metric in 1948. So while it’s certainly true that unemployment has now fallen from a peak of 10.0% in October 2009 to 7.9% in October 2012, that coincides with a decline of more than 2 percentage points in the labor force participation rate over this period, which hit a 31-year cycle low of 63.5% in August, due to a surge in discouraged workers, many of whom simply gave up looking for a job because of the weak labor market. Since World War II, no president has won reelection with unemployment above 7.3%. In fact, President Reagan in 1984—with unemployment at 7.2%—is the only president to win reelection with an unemployment rate above 6.0%.
Solid gains in nonfarm payrolls October rose by 171,000 jobs, which much stronger than consensus estimates for a gain of 125,000 jobs and our own admittedly more optimistic forecast here at Federated of 150,000. Importantly, the BLS revised August and September results up by a combined 84,000 jobs. August’s preliminary gain of 96,000 nonfarm jobs, which was revised up to a gain of 142,000 jobs last month, was revised up again to a final gain of 192,000 jobs. September’s preliminary gain of 114,000 jobs was revised up to a gain of 148,000 last month. So the average monthly employment gain for the last four months is a solid 173,000 jobs, which is well above the tepid second-quarter average of only 67,000 jobs, although it remains well below the more robust first-quarter pace of 226,000 jobs.
Private payrolls rise, too October rose by 184,000, which was also well above the consensus forecast for a gain of 123,000 jobs, while the BLS collectively revised August and September up by a healthy 61,000 jobs. August’s preliminary increase of 103,000 jobs, which was revised down to a gain of 97,000 jobs last month, was revised back up to a final gain of 134,000. September’s preliminary increase of 104,000 jobs was revised up to a gain of 128,000. So while the average monthly gain of 152,000 private jobs over the past four months is better than the second-quarter average of only 88,000 jobs, it remains well below the much stronger first-quarter average of 226,000 jobs.
Strong household gains The household survey rose by a solid 410,000 jobs in October, compared with a surge of 873,000 jobs in September. This is a much more sustainable monthly increase, as we had expected that for the third consecutive September, a seasonal one-month surge—largely due to the addition of 187,000 government jobs and 582,000 part-time positions due to slack business conditions—was reversed in October. All of this compares with outright job losses of 119,000 in August and 195,000 in July. The household survey is an important leading employment indicator for both nonfarm and private payroll growth.
Manufacturing and construction both positive With the positive turn in the ISM manufacturing index back over 50 the past two months, we’re not surprised that manufacturing added 13,000 jobs in October, after losing 14,000 jobs in September and 13,000 jobs in August. In contrast, manufacturing had gained 18,000 jobs in July, 7,000 in June, 13,000 in May and 10,000 in April, versus a first-quarter average of 41,000 manufacturing jobs per month. Due to continued strength in housing, construction added 17,000 jobs in October, on the heels of 2,000 jobs in September, 3,000 in each of July and August, and 4,000 jobs in June. That compares with job losses of 32,000 in May, 7,000 in April, 14,000 in March, and 1,000 in February. Back in January and December, however, construction had enjoyed solid gains of 18,000 and 26,000 jobs, respectively.
Temps turn positive Temporary help—another important leading indicator of employment growth—added 14,000 jobs in October, after losing 12,000 jobs in September and adding 3,000 jobs in August. Temporary help had added jobs during the four previous months (13,000 jobs added in July, 18,000 in June, 15,000 in May and 21,000 in April), after losing 13,000 jobs in March. But that compares with much stronger gains of 50,000 jobs in February and 36,000 jobs in January, so we’re still running at a relatively weak pace.
Christmas cheer? On the heels of a solid Back-to-School (BTS) season, retailers added 36,000 jobs in October, their largest monthly hire since April 2011, which suggests that internal planning for holiday shopping is constructive, consistent with our own forecast. By comparison, retailers added a relatively healthy 27,000 jobs in September and 18,000 jobs in August, in line with strong BTS results. Consumer spending accounts for 70% of Gross Domestic Product (GDP), so that has positive implications for fourth-quarter economic growth.
Government turns negative The difference between private and nonfarm payroll gains in October was the loss of 13,000 federal, state and local government jobs, compared with gains of 20,000 jobs in September, 58,000 in August and 18,000 jobs in July. The government had sustained job losses of 18,000 in June, 29,000 in May, 17,000 in April and 4,000 in March.
Unemployment ticks up, participation rate rises, U-6 ticks down The unemployment rate rose to 7.9% in October from 7.8% in September and from 8.1% in August, while the labor impairment (U-6) rate—also known as the “total” rate of unemployment, because it more broadly includes discouraged workers and the underemployed—ticked down to 14.6% last month. The improvement is due to the increase of 410,000 household jobs, an increase in the civilian labor force of 578,000 workers in October, and an increase in the number of unemployed of 170,000. This last metric is a counterintuitive positive, because it means that some formerly discouraged people felt good enough about their prospects to land a new job, to actually start looking again. As a result, the labor force participation rate rose to 63.8% in October from 63.6% in September and a 31-year cycle low of 63.5% in August.
Wages and private hours worked flat This was arguably the most disappointing aspect of the October labor report. Average hourly earnings in October were unchanged, which was well below expectations and represented a significant decline from the 0.3% rise in September. That plunges year-over-year wage gains down to a below-consensus 1.6% last month—the smallest such increase since 2007—which is down substantially from September’s1 .9% rate. The average private workweek for all employees was flat at a downwardly revised 34.4 hours in October. This is discouraging, because this decrease of 0.1 hour worked in October is the equivalent of reducing an estimated 400,000 jobs from the economy.
ADP revises methodology This important proxy for private payroll growth was stronger than expected with a gain of 158,000 jobs in October, compared with consensus estimates for a gain of 131,000 jobs. But that surprising beat was erased by a downward revision of 48,000 jobs in September, as the preliminary gain of 162,000 jobs was revised down to a gain of 114,000 jobs. Importantly, ADP announced a change in methodology starting in October, as they shifted from Macroeconomic Advisers in St. Louis to Moody’s Analytics in Pennsylvania, as their new partner. ADP increased the sample size with Moody’s, and they reported that in October, 50,000 jobs came from small firms, 27,000 jobs came from mid-sized companies, and 81,000 jobs came from larger companies. ADP has been an important leading employment indicator for us, so we’re going to monitor this methodology change closely.
Initial weekly jobless claims flattish Another important leading employment and economic indicator, weekly claims posted 363,000 for the week ended Oct. 27, down from the recent cycle peak of 392,000 for the survey week that ended Oct. 13. The smoother four-week moving average is at 368,750.