Employment Report Sends Mixed Messages

Payroll employment jumped by 261,000 in October after being revised up to 315,000 in September. Public sector employment rose by 28,000, driven by gains in hiring at the local level. Public schools and municipalities remain grossly understaffed.

The strength in private payrolls was due to outsized gains in health care, professional business services and manufacturing. Health care added nearly 53,000 jobs, which were concentrated in physician and dental offices where backlogs for routine visits have swelled. Professional and business services added 39,000. The demand was broad-based. Demand for accountants and scientific research and development services have both soared in the wake of initial lockdowns. Manufacturing gains were concentrated in the heavy manufacturing sector, where many producers are still playing catch-up to earlier supply-chain problems with computer chips.

Leisure and hospitality added 35,000, the bulk in accommodation instead of food services. That reflects the pent-up demand for travel; bookings for the holiday season have soared as people scramble to spend time with, instead of on gifts for, their loved ones this year.  

Retail hiring rose a tepid 7,000. Gains in clothing, vehicle dealerships and gas stations offset a drop in employment at more traditional department stores, big-box retailers, electronics and appliances and furniture stores. Those losses reflect the pullback in housing and are expected to mount as we move into the turn of the year. The overall housing market is already in a recession with the largest back-to-back losses in activity since the subprime crisis.   

Rental and leasing services also lost jobs, reflecting the weakness in housing. Construction employment was nearly unchanged, with losses in specialty contractors. These are workers who do finish work on commercial and resident properties.

Today’s payroll data shows that we generated a stunning 4.1 million new paychecks between January and October. That is nearly double the subdued annual pace of 2010s, and the second-strongest pace since 1978. Only 2021 was more robust.

That is important to the Federal Reserve, as it means that consumers could keep spending in the aggregate, even as individuals lose ground to inflation. It is one of many reasons why the labor market is now the target of rate hikes. The labor market is one of the few places that the Fed can both diminish demand for and increase the supply of workers via an increase in unemployment. That is a hard place to be.

Average hourly earnings rose 0.4% from September and were up 4.7% from a year ago. That is a slight cooling from the 5.0% annual gains we saw in September and likely reflects a move up in wages a year ago as well as a slowdown in labor turnover rates. Job openings rebounded at the end of September, while quit rates remained below the torrid pace earlier in the year. Wages for job hoppers are close to double the wage gains of those who stay, according to the recent ADP release on employment trends.  

The household survey, which surveys individuals instead of firms, tells a different story. Household employment fell 328,000 after rising 204,000 last month. The household survey captures the self-employed and agricultural workers.  

The unemployment rate rose to 3.7%, despite a small drop in the participation rate to 62.2%. The ranks of the unemployed rose with an increase in those who lost jobs and completed temporary jobs. New entrants were likely driven by those without a high school diploma. The losses in overall participation were among white teens, Hispanic women and Black men.  

The ranks of those who were out of the workforce to care for children hit 104,000 during the month, the highest on record. This is the same time that pediatric ICUs around the country are filling up with children sick with RSV, an upper respiratory disease. The ranks of those out sick and unable to work edged up to 1.3 million from 1.2 in September. That is 41% above the monthly average of the 2010s and is exacerbating staffing shortages and undermining productivity growth.

Separately, the ranks of those out on vacation also rose. This reflects the shift to hybrid work and pent-up demand for travel and tourism. It is one of many reasons that spending on services will weather the initial storm of rate hikes better than goods.   

Productivity growth fell for the third consecutive quarter in a row during the third quarter, the worst performance since 1982. That has increased unit-labor costs significantly and is adding to inflation, despite some cooling of wage gains.

Bottom Line:

Today’s labor report provides few reassurances for the Federal Reserve, despite the mixed messages between the establishment and household surveys. The costs associated with strong labor demand and diminishing labor productivity remain significant. The Fed could moderate the pace of rate hikes but remains committed to hitting a higher peak now on rates than it was in September.