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Daily Global Commentary

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October Employment Situation: Fed In Watch and Wait Mode

Sun, Nov 4 2007, 22:26 GMT
by Asha Bangalore

Northern Trust

October Employment Situation: Fed In Watch and Wait Mode

Civilian Unemployment Rate: 4.7% in October – unchanged from September

Payroll Employment: +166,000 in October, net loss of 10,000 jobs after revisions of payroll estimates for August and September.

Hourly earnings: +3 cents to $17.58, 3.78% yoy change vs. 3.97% yoy change in September, cycle high was 4.28% yoy change in Dec. 2006.

Household Survey – The unemployment rate was unchanged at 4.7% in October. The jobless rate is up from a low of 4.4% in March 2007, possibly the cycle low. In October, the labor force declined 211,000. On a year-to-year basis, the labor force grew only at a 0.7% pace during October compared with a 1.2% increase in the prior month, partly accounting for the low unemployment rate. The participation rate edged down to 65.9% in October from 66.0% in the prior month.

Establishment Survey – Nonfarm payrolls increased 166,000 in October, following a gain of 96,000 in the prior month. Revisions of payroll estimates for August and September resulted in a net loss of 10,000 jobs. Despite the impressive headline number for payroll employment, hiring has essentially cooled down. During the ten months ended October, firms increased payrolls at an average pace of 125,000 compared with an average pace of 189,000 in 2006.

Factory employment fell 21,000 in October, reflecting a decline of 6,000 jobs in the auto industry. A total of 275,000 factory jobs have been lost since June 2006. The decline in construction jobs in October (-5,000) was smaller than in the prior two months (-43,000). Hiring by specialty trade contractors rose 3,000 in October, with employment in the residential sector posting a decline of 13,000 and a gain of 16,000 jobs in the non-residential sector.
Service sector employment rose 190,000 in October vs. a gain of 120,000 in September. The 22,000 jobs lost in the retail sector were more than offset by hiring in the health sector (+34,000), professional and business services (+65,000), and the leisure and hospitality industry (+56,000). Although total employment in the financial sector was up marginally (+2,000), there were 39,200 jobs lost in the credit intermediation component of financial activities reflecting the recent financial crisis. Government employment advanced 36,000 in October after a gain of 23,000 in the prior month.
The 0.4% drop in the manufacturing man-hours index points to weakness in factory production in October. Hourly earnings moved up 3 cents to $17.58, putting the year-to-year increase at 3.78% vs. a 3.97% gain in the prior month. If hiring were robust, hourly earnings would show an accelerating pace, not a decelerating pace (see chart 3). The payroll and earnings number suggest a moderate increase in personal income during October.

Other noteworthy aspects of the employment report pointing to the underlying soft trend in hiring: (1) Both surveys show a downward trend in payroll gains on a year-to-year basis. On a year-to-year basis, payroll employment numbers are showing slightly stronger growth (1.2%) vs. the 0.5% increase in the comparable employment numbers from the household survey (+0.5%). In the past three months (see chart 4) data from the household survey show weaker growth compared with the establishment survey.

(2) The birth/death adjustment model of the Labor Department accounted for nearly 69% of the increase in nonfarm payrolls in the twelve months ended October compared with nearly 44% of jobs during the twelve months ended October 2006. Also, in October the birth/death adjustment model added 25,000 jobs to the financial activities component of payroll employment on a seasonally unadjusted basis and 14,000 jobs to the construction component. Both of these components are under severe stress in recent months which reduces the credibility of these estimates. (3) The 1-month and 3-month employment diffusion indexes (see chart 5) point to a significant downward trend, implying that hiring is not widespread.

Conclusion – Although the noticeable increase in payroll employment masks the soft tone of the October employment report, it allows the Fed to pause at the December 11 meeting, assuming there is no financial market turbulence between now and December 11 and economic reports suggest moderate growth in the economy. The 3.9% increase in third quarter real GDP, rising oil prices, and a weak dollar are additional reasons for the FOMC to watch and wait. Chairman Bernanke’s testimony on November 8 should offer more insights.

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Published on  Sun, Nov 4 2007, 21:30 GMT