Financial Review

October Jobs Report

…Economy adds 25,000 jobs in October. Unemployment rate holds at 3.7%. Wages grow at 3.1% annualized pace. Green light for Fed rate hike.

Financial Review by Sinclair Noe for 11-02-2018

DOW – 109 = 25,270
SPX – 17 = 2723
NAS – 77 = 7356
RUT + 3 = 1547
10 Y + .07 = 3.21%
OIL – .83 = 62.86
GOLD – .70 = 1233.20

The economy added 250,000 jobs in October. The unemployment rate held steady at 3.7%, a 48-year low. The U.S. has added an average of 213,000 jobs a month through the first 10 months of 2018, well above the 182,000 pace during the same period last year. In October, the year-over-year employment change was 2.51 million jobs. The September jobs report was revised lower, showing 16,000 fewer jobs than initially reported. The August report was revised higher, showing 16,000 more jobs than initially reported. Workers knocked off the payrolls by Hurricane Florence in September were added in October, though that artificial bump was likely offset somewhat by those whom Hurricane Michael put temporarily out of work in October. October marked the 97th consecutive month of job growth, extending an already record-making streak. Average monthly payroll increases have floated around the 210,000 mark over the past year. Last week, the government estimated that the economy grew at a hearty annualized rate of 3.5 percent in the third quarter.


The amount of money the average employee earns rose 0.2% last month to $27.30 an hour. The increase in pay over the past 12 months climbed to 3.1% from 2.8%, touching 3% for the first time since the end of the Great Recession in mid-2009. On a year-over-year basis, wages jumped partly because there was an unusual drop in pay in October last year after hurricanes. The average wage for the top 1% of income earners hit $719,000 per year in 2017, up 3.7% on the year, exceeding their peak of $716,000 per year just before the Great Recession. The average wage for the top 0.1% reached $2.7 million in 2017, the second-highest level ever, just 4% below their level in 2007. To put that in context: The median household income in the U.S. increased 0.5% to $63,007 in September 2018. That was the highest median household income than for any other month since January 2000. Income inequality has soared in the U.S. over the last five decades, despite increases in worker productivity and this increase in income inequality was almost entirely driven by soaring compensation levels for the top 1% of income earners. Incomes for most Americans have been stagnant for four decades.


For most U.S. workers, real wages have barely budged in decades. These should be heady times for American workers. U.S. unemployment is as low as it’s been in nearly two decades. In fact, despite some ups and downs over the past several decades, today’s real average wage — after accounting for inflation — has about the same purchasing power it did 40 years ago. Low wages in many sectors have contributed to financial instability. More than a quarter of Americans don’t earn enough to cover basic expenses, while more than a third are unable to pay all their bills on time, according to a report released Thursday by the Center for Financial Services Innovation, a nonprofit funded by foundations and several banks. That shortfall has contributed to mounting credit card debt and loan defaults.


The number of people working or looking for a job increased by 711,000, nudging the labor force participation rate up to 62.9 percent, from 62.7 percent in September. The labor-force participation rate, shows the number of people either employed or actively looking for work as a share of the total population. A low share of labor-force participation suggests that a portion of the population is either unable or unwilling to even look for work. This stat is important because once people have thrown in the towel on trying to get a job, it’s hard to get them to start again.  This means that the labor market is strong enough to pull workers off the sidelines. Since the recession ended, analysts have struggled to understand how many more potential workers are out there. Before the financial crisis, more than 66 percent of the population 16 or older was working or looking for a job. In recent years, that rate has rarely risen above 63 percent. Many of those workers will never rejoin the labor force — some have reached retirement age, others have seen their skills lose value, and a number are too disabled to work. Economists have had a spirited debate over how many more people could be lured back to the labor market. The relatively languid pace of wage growth indicates that there are still people on the sidelines who would be willing to take jobs if it seemed worthwhile. The bump up in October’s participation rate provides some evidence that this is the case.


In October, 79.7% of Americans aged 25 to 54—what economists call “prime-age” individuals—had jobs. That’s the same share as in late 2007, when the US teetered on the brink of the great recession. While employment levels for prime-age workers are reaching pre-crisis levels, they’re still way down from where they were in 2000, before the dot-com era downturn in 2001.


Women are coming back into the work force at a much faster rate than men. Over the past year, a net total of 1.4 million women have joined the labor force compared to 845,000 men. Employers say they are constantly on the hunt for workers. Midsize manufacturers are turning down lots of business because they can’t find the people and they can’t get the equipment fast enough. Help is not coming from abroad: The number of immigrant visas issued by the government has declined for two years in a row. The global outplacement and executive coaching firm Challenger, Gray & Christmas, which tracks hiring announcements, has reported that companies are looking to add 700,000 seasonal workers, the largest number since 2014. Job opportunities have finally begun rippling out to groups that were largely bypassed during much of the recovery: African-Americans, Hispanics, less-educated workers and people with disabilities have all seen their unemployment rates drop in recent months.


Construction companies have been ratcheting pay higher to find workers. Average hourly earnings for construction workers were $30.21 in October. That represented a 3.9% increase in wages compared to a year ago, the strongest yearly gain since mid-2009. As the housing crisis unfolded, a million and a half residential construction workers were laid off. Industry groups have complained for years that labor is too hard to find and say that’s holding back a more robust pace of home building. Higher pay would go a long way to solving that problem, and to some extent, industry actions over the past year or so have confirmed that idea. Annual wage increases for construction workers have increased an average of 3.3% during 2018, double the wage increases enjoyed by factory employees. In turn, that’s helped employers lure lots more workers: the construction industry added 330,000 jobs over the past 12 months.


The increase in hiring last month was broad based — not a single major industry shed jobs. Hotels and restaurants added 42,000 people to their staffs, health-care companies hired 36,000 workers, manufacturers filled 32,000 jobs and construction companies took on 32,000 new employees.


There were 4.6 million part-time workers in October who would prefer to have full-time jobs. The headline unemployment rate is known as U3. A different measure, known as U6, includes unemployed plus underutilized workers – the U6 unemployment rate was unchanged at 7.4% in October. The back-to-back hurricanes in September and October may have distorted the figures in unpredictable ways. It’s never happened before when you have hurricanes making landfall in successive survey weeks.


The S&P 500 was up 0.6% early today but stumbled to a loss of 1% in afternoon trading. The Dow Jones industrial average also reversed lower and was off 0.8%. The Nasdaq composite has been the day’s weakest index, down 1.3%. Apple was responsible for much of the Nasdaq’s struggles. Apple shares gapped down after the company late Thursday issued weaker-than-expected holiday sales guidance and announced it will stop disclosing unit sales of iPhones and other products. Selling intensified after White House economic advisor Larry Kudlow confirmed earlier reports that an agreement on trade issues with China remains elusive. Indexes were stabilizing around midday, but began a new leg lower after Kudlow’s remarks.


The jobs report cements expectations that the Federal Reserve will raise interest rates at its December meeting. The next Fed policy meeting is next week, but this meeting does not include a press conference and there are no economic projections due. The mid-December FOMC meeting is already slated for the fourth rate hike of the year. Next year, the Fed changes how they schedule press conferences and economic projections. Next year, we could get policy action at any given FOMC meeting, and there is a good chance we will see 4 rate hikes next year, pushing the Fed Funds target rate up to about 3.5%. It has been a long time since we have seen significant inflation. The Philips Curve is the statistical relationship between low unemployment and rising inflation; when inflation drops to very low levels, employers have to pay higher wages to retain workers. Add in supply chain constraints associated with nascent trade wars, and for the first time in about a decade the possibility of substantial inflation is becoming real. Whether we see wage push inflation now depends on how many potential workers are still sitting on the sidelines. The more there are, the more growth the economy can sustain without stumbling into an inflationary spiral.


For the week, the S&P 500 and Dow each rose 2.4 percent and the Nasdaq climbed 2.7 percent.

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