Robust October jobs report surprises
Bottom line This morning’s October labor market report shrugged off numerous headwinds, including the 6-week General Motors strike affecting 46,000 United Auto Workers, continued economic pressure from the U.S.-China trade war, ongoing production problems from Boeing’s sidelined 737 MAX jet and the loss of 20,000 temporary census workers. Despite all this, October’s employment report was much stronger than expected across the board, with a gain of 128,000 nonfarm payroll jobs, compared with consensus expectations of only 85,000 and Federated’s more optimistic forecast of 97,000.
But revisions also are an important part of this positive narrative. August and September figures were revised sharply higher by a combined 95,000 jobs. So in conjunction with October’s healthy 43,000 beat, the labor market boasted 138,000 more jobs than the consensus believed the economy had created over the past three months.
Frankly, this should not have been a surprise to investors. As we discussed in each of the past two months, August is the statistically quirkiest month of the year for the labor market. The flash report for the month has missed consensus expectations to the downside by an average of 40,000 jobs over the past decade, only to be revised higher by an average of 65,000 over the subsequent two months. The final August 2019 tally is that the preliminary report of 130,000 was revised up to a final gain of 219,000, for a net positive revision of 89,000.
For those investors who firmly believe we’re in a late-cycle economy with recession lurking just around the corner, we’ve got some bad news. First, we think recession risks remain at bay until 2021 at the earliest. Next, after the Federal Reserve’s third-consecutive quarter-point rate cut Wednesday, putting the upper band at 1.75%, it is justifiably in a wait-and-see pause mode. Finally, this week’s better-than-expected third-quarter GDP report of 1.9%, in conjunction with this morning’s terrific labor market news, should continue to power the S&P 500 up to our long-standing year-end 2019 target of 3,100, with gains to 3,500 expected in 2020.
Strong positive revisions October’s stronger-than-expected gain of 128,000 jobs was higher than the consensus estimate of 85,000 and Federated’s more-constructive forecast of 97,000. But August was revised up by 51,000 to a final gain of 219,000, and September was revised up by 44,000 to a gain of 180,000. Government hiring in October actually slipped by 3,000, led by a loss of 17,000 federal workers, which was partially offset by state and local gains of 3,000 and 11,000, respectively. As a result, private payrolls rose by 131,000 in October, well above consensus estimates of 80,000, with combined positive revisions of 94,000 in August and September.
Household survey solid The admittedly volatile household survey (a leading employment indicator) added 241,000 jobs in October, rising for the sixth consecutive month, compared with 391,000 in September, 590,000 in August (its highest level since February 2018), 283,000 in July, 247,000 in June and 113,000 in May.
Construction positive, manufacturing negative The construction industry added 10,000 jobs in October, versus upwardly revised gains of 11,000 in September and 7,000 in August. The manufacturing sector did not suffer as big of a loss of jobs as expected in October at 36,000 lost (consensus was 55,000), largely due to the now-settled GM strike. It lost 5,000 in September, with a modest gain of 2,000 in August. Today’s October ISM manufacturing index at 48.3 is still contractionary. It was below consensus expectations of 48.9, but still higher than September’s 47.8—a 10-year low.
Unemployment, labor impairment & participation rates all rise The unemployment rate (U-3) consolidated at 3.6% in October, up from 3.5% in September (a 50-year low), and the labor impairment rate (U-6) rose to 7% in October from 6.9% in September (19-year low), due to 325,000 new entrants into the civilian labor force. The labor force participation rate ticked up to 63.3% in October, a new 6-year high.
Wages rise, hours worked flat Average hourly earnings rose 0.2% month-over-month (m/m) in October, up from breakeven in September but down from a 0.4% m/m gain in August (which matched a 5-year high). The year-over-year gain in October was unchanged at 3%, below February’s 10-year high of 3.4%. But this deceleration in wage growth should extend the economic expansion and help quell fears of recession. The average private workweek for all employees was unchanged for the third consecutive month and for the fifth time in the past six months at 34.4 hours worked in October. A change of 0.1 hour worked theoretically adds or subtracts 350,000 jobs to or from the economy.
Retail improved After cutting jobs for seven consecutive months through August, October added 6,000, compared with an upwardly revised gain of 7,000 in September (preliminary loss of 11,000). That compares with job losses of 1,000 in August, 2,000 in July, 12,000 in each of June and May, 15,000 in each of April and March, and 14,000 in February. Retail has strengthened in recent months, with a solid 4% Back-to-School gain in 2019 compared with last year and with expectations for a 4-4.5% increase for Christmas. As a result, major retailers and transportation companies (UPS and FedEx) have already begun to orchestrate healthy holiday hiring plans.
Temps slip Temporary help (a leading economic indicator) lost 8,000 workers in October, after adding 20,000 in September and 10,000 in August, compared with losses of 11,000 in July, 3,000 in June and 2,000 in May. But August and September’s strength may be related to census hiring, which downsized 20,000 decennial census workers in October.
Claims steady ADP mixed The survey week for initial weekly unemployment claims, an important leading employment indicator, was a steady 218,000 for the week ended October 12, higher than the 49-year cycle low of 193,000 in April. ADP’s private-sector hiring was a stronger-than-expected 125,000 jobs in October (consensus at 110,000), but September was revised sharply lower, from a preliminary gain of 135,000 to 93,000.