Oh boy, last month the U.S. economy exceeded expectations.
The BLS October ’15 Report Outlines Key Developments:
- 271,000 new jobs have been added
- Hourly earnings went up 2.5% over the year
- The unemployment rate went down to 5.0%
- Labor force participation is at 62.4%
Public reactions have been mainly positive but it is easy to be misled by certain indicators.
Lets have a closer look at the numbers.
#1: Job Difference Confirms Seasonal Weakness of Previous Months
The much bigger than expected 271,000 surge in non-farm payrolls in October confirms that the weakness in August and September was just a temporary blip and, given the circumstances, a December interest rate hike would now appear to be the most likely outcome.
– Paul Ashworth, chief US economist at Capital Economics
The numbers in the BLS employment report suggest that the economy is strengthening.
Federal reserve chair Janet Yellen said there is a real possibility for the first interest rate increase since the 2008 recession.
The Fed is closely observing developments in the labor market and will decide on the interest rate increase on December 15th/16th.
#2: Tight Labor Market Drives Up Hourly Wages
Businesses are raising wages in response to the fact that it is tougher and tougher to find workers.
When I go out and talk to people, I ask them: ‘Are you having difficulty recruiting workers?’ I always have people raising their hands.
The labor market is tightening.
– Gus Faucher, senior macroeconomist at PNC
Amidst fights for minimum wage increases all industries have seen an aggregated hourly wage growth of 2.5% over the past year.
Economist Paul Ashworth also expects ‘strong wage growth and price inflation over the next year’, which most likely would result in a tighter fiscal policy than currently projected by the Federal Reserve.
#3: Unemployment Rate as a Misleading Indicator
At this pace, if sustained, which seems likely, the economy will be at full employment by next summer. Pressure on the Fed to begin normalizing interest rates is also mounting as full employment approaches.
– Mark Zandi, chief economist at Moody’s
In October unemployment (U-3// official unemployment number) went down to 7,908,000.
In addition underemployment (U-6) dropped from 10.0% to 9.8%.
Despite improvements these numbers from the employment report don’t show the full picture.
The biggest problem of the U-3 number is that it does not cover citizens who have completely dropped out of the labor force.
#4: Labor Force Participation at a Historic Low
The Federal Reserve should keep in mind the lackluster growth we’ve seen throughout 2015 and continue to let the economy recover.
They should not raise interest rates until wages rise further and for a sustained period of time, and people on the edges of the economy get jobs.
– Elise Gould, senior economist at EPI
At only 62.4% the labor force participation rate is the lowest since 1977.
- Aging U.S. Population – baby boomers retire at a growing rate
- Difficult Job Market – a big number of people is discouraged in participating in the labor market and have stopped looking for a job
- Disability – more people are applying for disability insurance
This means that 94,513,000 Americans are not in the labor force.
The most interesting lever in this group of people are the discouraged citizens, who might have the skills to participate in the labor market but have lost the desire.
Time will show if & how new methods of job search or opportunity allocation can tap into this underserved segment of U.S. citizens.
- Federal Reserve will most likely raise interest rates in December due to positive labor market developments
- Despite improving unemployment numbers (5.0%) the participation rate (62.4%) is still at its lowest point in 38 years
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