Today’s monthly employment report surpassed expectations, with 204,000 jobs being added to payrolls in October, and with some substantial upward revision to data from the previous two months.
September’s non-farm payrolls were amended to 163,000 from an originally-reported 148,000, while August’s increase was revised to 238,000 from a previous estimate of 193.000, meaning the net upward revisions for these two months totalled 60,000. The consensus of expectation amongst analysts polled by Reuters was for a gain of just 125,000 in October.
On the face of it, this is a strong result, especially considering the report spans the period of the partial government shutdown. Average hourly earnings increased by just 0.1%, though, below expectations for a 0.2% increase, and there was no improvement in the average workweek, which stayed at 34.4 hours, just below the consensus forecast. So there are still some symptoms of inertia and, more problematically, the unemployment rate crept up to 7.3% from September’s level of 7.2%.
On balance, this probably does tip the scales slightly in the favour a taper moving closer, but perhaps not as much as the strength of that headline payroll number suggests. Unemployment lingering so stubbornly at such an elevated level is clearly not a case of mission accomplished by the Fed, and I can’t see them moving to reduce stimulus until that comes down for at least two consecutive months.
Inflation remains another area in which the Fed is not yet seeing what it wants. The Fed has stated that inflation, as measured by the annual change in the price index for personal consumption expenditure (PCE), at a rate of 2% is ‘most consistent’ with its statutory mandate. PCE data for September was released today and showed that inflation was not just below target, but also moving in the wrong direction. The year-on-year change in the PCE price index was just 0.9% in September, down from the 1.2% seen in August.
That means that we could have the rosy scenario, as far as the stock market is concerned, of faster economic growth (non-farm payrolls has a very strong historical correlation with GDP), while the Fed feels compelled to maintain monetary stimulus because of persistently off-target unemployment and inflation.
This scenario has helped push share prices higher on Wall Street today, with the Dow gaining 82 points or 0.53% to 15,676 by early afternoon in New York, while the S&P 500 gained more than 1% to stand at 1765.90.