There’s No Cooling Trend in the Jobs Numbers
The Department of Labor’s monthly jobs report includes a line counting the number of people who are out of work because they were working in temporary jobs that have been completed. After the October jobs report, you can add Jerome Powell and his fellow members of the Federal Open Market Committee (FOMC) to the list.
Employers grew their payrolls by 150,000 jobs in October, according to the tally released Friday by the Labor Department. This was below the expectation for around 180,000 jobs and represents a significant slowdown in hiring in the month.
This is the second-lowest increase in payrolls since 2020, when the labor market was ravaged by the pandemic and lockdowns. The lowest was the 105,000 in June of this year. That sharp plunge in job growth was largely overlooked, however, because the preliminary estimate was for growth of 209,000. While the preliminary estimate was below expectations and indicated a cooling of hiring, it was not until a month later that we learned just how big the June decline really was.
Revising and Reversing the Revisions
The October report included significant downward revisions to the two prior months. The August jobs report originally reported a gain of 187,000, above the 170,000 expected. A month ago, this was revised up to 227,000. On Friday, the Labor Department reversed this revision, bringing the estimate all the way down to 167,000. September’s blowout number of 336,000 was revised down to a still-strong 297,000. As a result of the revisions, the economy had around 101,000 fewer jobs than previously thought.
All these revisions should introduce a note of caution about the risks of overplaying any single month’s data. The payrolls estimates are not only a volatile series, they are frequently subject to large revisions that can substantially alter how we should be thinking about the labor market.
Prior to the revisions on Friday, the three-month moving average of employment gains from July through September was 266,000. After the revisions, this average fell to 233,000. That means that employment gains had increased from the three-month period from April through June, when job growth averaged 201,000.
With the October data, the three-month moving average falls to 204,000, just below the 207,000 for the prior three-month period. The six-month moving average is 206,000. This indicates that while payroll growth has slowed from the red hot numbers of last year, when job growth averaged 399,000 per month, there has not been much cooling since this spring.
This corresponds with what we’ve seen in the inflation numbers. There were strong disinflationary pressures that brought down the pace of price hikes from last year’s four-decade highs. But the more recent data indicates that inflation has become stuck at an elevated level, and the rate hiking cycle that went into early hibernation back in September are no longer visibly cooling prices.
Doves Are in Control at the Fed
Fed officials, however, are far more optimistic. In recent speeches and in Jerome Powell’s post-meeting press conference, Fed officials have repeatedly conveyed the impression that they suspect there are still lagged effects from past hikes that will continue to put disinflationary pressure on the economy for months to come. The stickiness in recent employment data and inflation figures has been breezily written off as “bumps” on the path toward the Fed’s two percent target instead of evidence that the path may have become a cul-de-sac.
As a result, Fed officials are likely to see the October jobs numbers as justifying not raising their interest rate target at the December meeting. They will have just one more employment report in hand by that meeting. Even if it comes in sizzlingly hot, Fed officials will be able to write it off as just another “bump.” So the October jobs figure probably put the final nail in the coffin of the rate hiking cycle.
That certainly is the view reflected in the federal funds futures market. The implied odds of a hike in December dropped from around 20 percent over the past week to less than five percent after the jobs report.
“Put a fork in it – they are done,” Jay Bryson, Wells Fargo & Co. chief economist, told Bloomberg News. “If you are an FOMC official, this is what you wanted to see. This is very good news for the Fed.”
Traders work on the floor of the New York Stock Exchange during morning trading on November 1, 2023, in New York City. Stocks opened up slightly high amid Federal Reserve Chairman Jerome Powell’s news conference and a decision on interest rates. (Michael M. Santiago/Getty Images)
The market has also moved up its timeline for the first Fed cut. Since the 1990s, the time between the last Fed hike and the first Fed cut is around 10 months. If the last hike was in July, that suggests the first cut could come as early as May. And sure enough, that’s what markets are now forecasting. The odds of a May cut rose to 62 percent after the jobs report. The odds that there will have been at least one cut by June are now 85 percent, with around a 50 percent chance of two hikes.
Stock and bond prices are also reflecting this view of a more dovish Fed. Stocks mounted a fierce rally on Thursday following what was interpreted to be the Fed’s dovish pause at the meeting that ended Wednesday. Stocks followed this up with a gentler but confirming rise on Friday. Bond yields have plunged. The 10-year yield had reached almost five percent on October 19. On Friday, it had fallen to near 4.5 percent. The two-year yield, which was up to 5.2 percent in mid-October is now back down to 4.8 percent.
There may be more market volatility ahead if Fed officials decide to push back against the idea that the first cut will come in the first half of the year. Fed officials, however, may decide not to introduce more volatility into this market, so perhaps they will hold off on communicating a more hawkish view. At the press conference on Wednesday, Powell said members did not discuss the timing of future rate cuts, a slightly gentler version of his statement last year that the Fed was not even “thinking about thinking about rate cuts.” That could mean the Fed will let the market run with its dovish interpretation of the likely path of monetary policy.
The UAW Strike May Have Distorted the October Data
There was one quirk in the jobs numbers that was largely overlooked in the initial analysis and market reaction. The auto sector shed 33,200 jobs in October, accounting for almost all of the 35,000 contraction of jobs in manufacturing. Many of those losses are likely to be related to the now-concluded strike by the United Auto Workers (UAW). As a result, they are likely to quickly reverse and become additions to payrolls in the next report.
United Auto Workers members strike the General Motors Lansing Delta Assembly Plant on September 29, 2023, in Lansing, Michigan. (Bill Pugliano/Getty Images)
How large of an effect could this have on the numbers? At the height of the strike, 46,000 or so union members were out of work. In addition, there were likely thousands more workers at third-party manufacturers who were temporarily out of work due to production stoppages at the union plants. To be conservative, we can estimate that around 50,000 workers were missing from October payrolls due to the strike.
If we add the striking and strike-adjacent workers back into the figures, we get payroll growth of around 200,000 in October. That would be almost a bullseye with the three and six month averages, implying no further cooling at all in October.
