U.S. economy added 531,000 in October

The economy added 531,000 jobs in October, beating market expectations while the unemployment rate fell to 4.6%. KPMG Chief Economist Constance Hunter discusses key takeaways from this month's report.

Constance L  Hunter

Constance L Hunter

Principal and Chief Economist, KPMG LLP

+1 212-954-3396

Video transcript

September retail sales rose by a better than expected 0.7% on a month-to-month basis sharply beating market expectations for a 0.2% drop. What's clear in the September report is that covert cases or delta in this case continues to impact consumer buying patterns with goods purchases rising when cases surge and services activity receding. With Covid cases now in the decline we expect to return to more normal behavior with the larger services sector improving in the months ahead and goods purchases moderating. Here are some good news, the latest KPMG holiday consumer pulse survey sure that 32% of respondents expect to do in-store shopping for Black Friday which is double the amount of respondents last year. With consumers excited to return to in-store shopping we expect to see a pickup in economic activity in the fourth quarter.

 

Diagnosing employment

October jobs growth shows that the health and stability of the labor market are still closely tied to COVID patterns

The month of October had healthy employment growth as COVID cases continued to drop. Overall, 531,000 jobs were added to the U.S. economy, bringing the 3-month average to 442,000 (accounting for revisions to the prior months). Although jobs growth was broad-based, the continuing recovery of the leisure and hospitality industry is of note as it is an important bellwether for the services industry, adding 164,000 jobs in October on top of the 2.4 million jobs the sector reclaimed since the start of the pandemic. Additionally, manufacturing employment, particularly in autos, saw gains, as did construction, business services, and healthcare.

The subtleties of labor market slack

One area of great attention is that of the labor force participation rate. During recessions the labor force participation rate declines, as discouraged workers temporarily retire from the labor force. Data shows that people return or become new entrants to the labor force during expansions. This assumption, that people will return to the labor force, is the dominant factor causing the bond market to forecast that the Federal Reserve will not hike rates until after the 3rd quarter of 2022, and possibly not until 2023. 

Overall, the unemployment rate fell to 4.6%. However, pinpointing true labor market slack is a bit more complicated when considering the impacts of Long COVID1, as well as drops in childcare-sector employment that are keeping workers out of the labor force. Over the course of the pandemic, the labor force shrank by approximately 4 million people. Of these, 500,000 to 1.3 million are estimated to be afflicted by Long COVID, which means they may never fully return to work. Another 1.2 million have had their employment prospects hindered by the deficit in childcare workers. 

We will be watching the data on labor force participation, childcare employment, and the impacts of long-Covid in the coming months to determine the true labor market slack. 

A slight rise in earnings

Average hourly earnings rose slightly in October, up 4.9% compared to last year, while there were larger increases in professions where labor supply shortages are most acute such as leisure and hospitality. Due to base effects, however, it is important to consider earnings over longer time periods. For example, in the leisure and hospitality sector, the six-month moving average of wage increases is 9% versus 4% for total private hourly earnings. Likewise, retail jobs are commanding almost 5% greater wages on a six-month average basis. As the expansion continues and provided that COVID can be put in the rearview mirror, we expect labor market shortages to ease in these sectors over the next six to nine months.


Ongoing vigilance

In the coming weeks and months, economists will be keeping an eye on these evolving factors:

  • Whether distortions from COVID will continue to disrupt typical labor force patterns over the business cycle.
  • How long labor market shortages and corresponding wage pressures will persist.
  • How these frictions may impact the path of monetary policy.