Friday’s employment report released by the Bureau of Labor Statistics was encouraging. We added 171,000 payrolls in October, and previous months were revised upward by +84,000. A majority of private industries added jobs during the month. The unemployment rate ticked up to 7.9% as more people entered the workforce than could find jobs.
This report is consistent with sluggish growth and should not warrant any change in monetary policy. The Fed is looking for a “substantial improvement” in the labor market, which includes an increase in labor force participation. The labor force participation rate, which had been declining precipitously since mid-2008, moved up to 63.8% after hitting a record low 63.5% in August. Consumer perceptions surrounding the economy have improved, which will draw more people back into the labor force. However, the economy is not growing fast enough to absorb all of the new entrants.
There remains considerable slack in the labor market, and as a result, wage growth has been dismal. Friday’s report continued on that trend, with average hourly earnings growth falling to just 1.1% year over year. With inflation running at 2.0% year over year, wages are contracting in real terms. Weak wage growth will keep a lid on inflation.
With payroll growth averaging 170,000 over the last three months, and the employment rate now below 8%, there are positive signs in the labor market. However, we still have a long way to go. Economic growth at 2% is not strong enough to bring down the unemployment rate substantially. The slack in the labor market will continue to place downward pressure on wages, which will impact consumer spending. The Fed has committed to remain accommodative until they see more progress. Help from the fiscal and regulatory side – in addressing the fiscal cliff and then putting into place a longer-term fiscal plan – would be a big positive, providing companies with some certainty and the confidence they need to increase hiring plans.