Labor market rebounds
Solid gains across the board in October.
October’s nonfarm payrolls enjoyed a stronger-than-expected gain of 531,000 jobs this morning, with the previously disappointing months of August and September revised higher by a combined 235,000 jobs. The Bloomberg consensus was expecting an increase of 450,000 jobs last month, although our more optimistic forecast here at Federated Hermes was for a much larger gain of 577,000. The unemployment rate fell to a new cycle low of 4.6%.
The S&P 500 rallied to a record high of 4,718 on this morning’s good news, up 10% over the past month, and seems to be grinding inexorably toward our 4,800 full-year target. October is the month bear markets typically go to die. As if on cue, stocks have risen after their 6% correction from Sept. 2 to Oct. 4.
Why has the labor market seemingly turned the corner? In our view, the Covid-19 delta variant peaked at Labor Day and has declined sharply in most states, and the 85% decline in the vaccination rate we’ve experienced since April has stabilized. In addition, schools and childcare facilities have begun to reopen over the past two months. Moreover, with the end of the $300 weekly federal unemployment bonus in September and with savings rates beginning to normalize since March, people finally are heading back to work to support their families, a positive hiring trend we expect to continue in coming months.
Claims, ADP and JOLTS strong Why was Federated Hermes’ forecast so much higher than the consensus estimate? First, the October survey week for initial weekly jobless claims fell to a post-pandemic cycle low of only 291,000 claims, and they continued to decline to a lower-than-expected 269,000 claims for the week ended Oct. 30, down 96% from their April 2020 peak. Next, October’s ADP report surged by a stronger-than-expected, four-month high of 571,000 jobs (400,000 consensus estimate). Finally, the lagging Job Openings and Labor Turnover Survey (JOLTS) posted a record high of nearly 11.1 million job openings in July and 10.4 million in August. Voluntary quits rose to a record 4.3 million in August, with a record quits rate of 2.9%, as the “Great Resignation” continues.
Fed commences taper Recognizing these favorable labor-market trends, the Federal Reserve announced this past Wednesday the beginning of its highly telegraphed quantitative easing (QE) tapering program. Policymakers will reduce bond buying at a pace of $15 billion monthly ($10 billion in Treasuries and $5 billion in mortgage-backed securities), so their $120 billion monthly purchases could reach zero by June 2022. The Fed left itself wiggle room to adjust this pace—either faster or slower—depending on the direction of the economy, the labor market and inflation in coming months. But we still expect the first interest-rate hike to come in the second half of 2022, with more in 2023.
Government hiring falls Perhaps the weakest aspect of this morning’s otherwise strong jobs report was the decline by 73,000 jobs in overall government hiring. But a plunge in local and state hiring dominated that trend, with sizable drops of 45,000 and 25,000 workers in October, respectively. Vaccine mandates for teachers and other school employees have caused significant dislocation, as schools are attempting to reopen in person. But the flip side is that private payrolls have surged, with a stronger-than-expected gain of 604,000 new hires in October (versus an expected consensus gain of 420,000), with a combined upward revision of 220,000 private jobs in August and September.
Sector details strong The manufacturing sector doubled expectations with a powerful gain of 60,000 jobs in October, the highest level since June 2020, as the auto market is starting to recover. Construction rose for the second consecutive month, adding 44,000 jobs in October after 30,000 in September. Anticipating a solid Christmas, retailers added jobs for the third consecutive month, hiring 35,000 workers last month after adding 57,000 workers in September. Temporary hiring, a leading indicator of employment trends, accelerated in October with gains of 41,000 hires, up from 6,000 in September. Finally, leisure & hospitality nearly doubled its monthly hiring pace in October with 164,000 new workers (versus 88,000 in September).
Participation rate stagnant The household survey climbed for the fourth consecutive month in October by a solid 359,000 jobs, and the number of unemployed people similarly fell for the fourth consecutive month by 255,000. Consequently, the unemployment rate (U-3) plummeted to a new cycle low of 4.6% last month from 4.8% in September and from 5.9% in June. We think U-3 could approach its pre-pandemic cycle low of 3.5% over the next 12-18 months. The labor impairment rate (U-6) also fell to 8.3% last month from 8.5% in October and from 10.2% in May. The civilian labor force added 104,000 workers last month, reversing a decline of 183,000 people in September. But the participation rate continues to disappoint, remaining stagnant at 61.6% in October.
K-shaped recovery improves The so-called K-shaped labor market recovery took a sizable step in the right direction in October, as the unemployment rate of low-wage workers plunged to 7.4% from 7.9% in September. Those with higher wages, in contrast, saw their unemployment rate decrease a tick to 2.4%.
Wage inflation remains hot Average hourly earnings rose 0.4% in October month-over-month and 4.9% year-over-year. But over the past seven months, wages have surged at an annualized pace of 5.8%. This concerns us, as accelerating inflation is taking a bigger chunk out of workers’ paychecks, prompting many to change jobs or demand salary increases from their current employers. Hourly workers at Deere, for example, have voted down two generous contract offers, and they are now locked in a two-week strike for better pay and benefits. This typically results in a reinforcing inflation cycle, as companies will simply pass these higher labor costs onto their customers in the form of higher prices.