Fed Watch: A Solid Report

Tim Duy:

A Solid Report, by Tim Duy: Not the greatest, but solid and encouraging, is how I describe the October employment report. Nonfarm payrolls gained by 171k, and the two previous months were revised upward. Interestingly, the August number, which originally posted at 92k and cleared the way for QE3, has been revised up to 192k. I have trouble believing that the FOMC moderates would have fallen in line with Federal Reserve Chairman Ben Bernanke in the wake of a 192k NFP gain. This is especially true given the subsequent numbers. In short, the August print came at just the right time, allowing Bernanke to clear away concerns of premature tightening just as the economy was set to show signs of strength.

The average gain in the last three months was 170k, just above the twelve-month average of 162k. Looking through the peaks and valleys, the last year has been remarkably steady:

We have seen two solid back-to-back gains in civilian employment, suggesting that recent NFP gains are not ephemeral:

The unemployment rate ticked up, but for the right reason - the labor force participation rate rose, hopefully signaling that improving labor market conditions are drawing people back into the labor force. Of course, still not all is well. For example, long-term joblessness remains high, as does employment part-time for economic reasons. Indeed, dismal wage growth continues to reveal the underlying weakness of the labor market:

Such low wage gains means inflation concerns should remain on the backburner. I think it is very unlikely that sustained, higher inflation can be propagated in this environment.

Bottom Line: A solid report, and another step in the right direction. Not entirely clear that it is a precursor to much better things to come; feels more like a continuation of the slow and steady pace of the past two years. Nothing to say that the economy can survive a fiscal cliff unscathed. And obviously nothing to suggest a change in monetary policy in the near future. Note too that it contains no information about Hurricane Sandy. Expect choppy labor data in the weeks to come, first with increasing jobless claims. Also expect monetary policymakers to try to look through the hurricane-impacted data and focus on the path of the underlying economy.