Highlights:
- Payroll employment jumped to 261k from 18K in September as the downward impact from Hurricanes Irma and Harvey reversed.
- The October unemployment rate unexpectedly dropped to 4.1% from September’s 4.2% though this did not prevent the annual increase in wages moderating to 2.4% from 2.8% the previous month.
Our Take:
The robust 261k rise in October payroll employment was in part bolstered by the unwinding of the hurricane-related impact in September that limited that month’s payroll gain to only 18k (originally reported as down 33k). The average increase between the two months of 140k better reflects the underlying trend over this period. This modified increase does represent a slight easing from the 160k average increase over the previous six months though this is likely more indicative of labour markets approaching capacity, and reduced availability of workers, rather than indicating any weakening in demand. This tightness in labour markets was clearly conveyed by the unemployment unexpectedly dropping to 4.1% from and already low 4.2% in September. This October rate is significantly below the Fed’s assumed long–run equilibrium range of 4.5% to 4.8%. However, indications of labour markets operating at, if not beyond, capacity are not putting any material upward impact on wages with the annual increase in October wages moderating to 2.4% from 2.8% in September and the 2.6% that prevailed the previous two months.
Today’s employment report makes clear that the weakness in September employment was clearly a temporary weather-related phenomenon. Controlling for this factor, the underlying employment gains likely remain sufficient to keep the above-potential GDP growth evident in the second and third quarters continuing into the fourth quarter. Such is expected to keep the Fed gradually tightening policy. Our forecast assumes that the Fed will raise fed funds another 25 basis points at the next FOMC meeting in December followed by similar-sized hikes every quarter through 2018. The tightening is also consistent with inflation rising through the forecast though not threatening to move beyond the central bank’s 2% objective.
