Main takeaways:
  • Very strong report, across the board; 268k jobs were created in the private sector, and Aug/Sep job gains were revised up by 56k.
  • Weak job creation in August / September raised concerns about the health of the economy, but the October report seems to confirm my take that labor market was not as weak as portrayed by the previous two reports (see US labor market conditions suggest job creation higher than observed in Aug/Sep).
  • The pickup in wage growth (0.4% mom and 2.5% yoy) may be a reminder that the Phillips Curve is not dead.
  • Measures of labor slack kept shrinking, particularly those measures Yellen likes to focus (e.g., part time for economic reasons, marginally attached,...).
  • Particularly worrying is the decline in labor force participation (LFPR), which seems to be heading down after a brief respite.
  • If LFPR remains flat a mere 135k/month payroll for the next 14 months is needed to reach the 2016 median unemployment forecast.
    • Job growth above 135k/month or falling labor force will result in unemployment rate undershooting Fed's forecasts.
  • If employment growth slows from the current 2.3% to 1.5% yoy and LFPR remains constant (against structural trend), then unemployment rate would reach 4.4% by the end of 2016.
  • Allowing the LFPR to continue its down trend since 2010, 135k/month would lead unemployment rate to 4.0% by the end of 2016!
  • As for the timing of liftoff... last month I wrote: "Since I believe the payroll slowdown is temporary and that global risks are likely to recede in the coming months, I think December is still the most likely date for moving out of the ZLB". That remains the case since the October report confirmed my previous beliefs.

Establishment report:
Private payroll increased 268k in October, well above the bloomberg consensus. Net revisions were positive 56k.

The table below shows the expected range for private payroll (excluding outliers), the monthly surprise and revisions to the last 3 months. The actual print is in "red" (an "x" when inside the expected range and a box when outside).

It is interesting to see the shape of the gray area! The negative surprises in August and September led to a material downward change in market's expected range for private payroll.


Market has been on track forecasting the pace of job creation in the last 6 months!
One can see that the average of the median expectations for the last 12 months was 215k/month, very close to the actual releases of 223k/month in the same period (after revisions, private payroll averaged 226k/month in the last 12 months).

In the last 6 months the median expectations averaged 205k/months and the actual release averaged 204k (201k/month after revisions).

In the last 3 months the median expectations averaged 190k/m and the actual release averaged 175k/month (181k/month after revisions).

Payroll trend
The trend in private payroll (measured by the 12-month moving average) moved up to 226k/month from 217k/month (unrevised) in September. The chart below shows the current vintage (orange line) as well as the real time path observed in each of the last few months.

It is clear that the pace of job creation has slowed from the excessively high pace observed in Q4 2014 and Q1 2015.


The chart below shows that annual growth rate in private payroll is growing at 2.3% yoy -- off the highs but is still a healthy pace of growth.


The current yoy growth (2.3%) continues very close to the growth observed in private payroll in the last 3 years, which is above the peak observed in March/2006 during the previous expansion period and is closer to the growth rate observed in the late 1990´s.

Labor input:
The volume of total hours worked in the economy increased in October recovering from September drop and seems to be back on the trend ince 2009. Total hours worked increased 1.8% (annualized) in the last 3 months (blue line in the chart below).


The recovery in hours worked was mostly due to the goods sector. But it is probably too soon for manufacturing and mining jobs and hours to rebound substantially in the coming months.
Hours worked in the services sectors continued performing well.



Wages:
Wages (average hourly earnings) increased In October.
Wages for all employees rose by 2.45% yoy (vs 2.2% in September) and for production worker rose 2.2% yoy (vs 1.9% in September). Overall, as the chart below shows, average hourly earnings have consistently grown at about 2.1% p.a in the last three years.


Household income:
Good. Close to the trend observed in the last three years.


Goods sector nominal income rebounded.

Services sector income also back to a healthy trend.


Household report:
The labor force participation rate moved 'sharply' down in September to 62.4% and remained at the same level in October, breaking what had appeared to be a stable level. It is interesting to highlight that the most LFPR managed to do was to stabilize in 2014 -- a year in which job creation and labor market conditions improved quite substantially. If the LFPR resumes its structural downtrend it could put the Fed in a position where they see labor slack shrinking faster than what they forecast, despite a similar economic growth outlook.

The broader measure of unemployment (U-6), which includes marginally attached, discouraged workers, and employed part time for economic reasons is falling faster than the headline unemployment.

The median forecast for unemployment rate in the Fed's SEP (Summary of Economic Projections) is 4.8% for 2016, 2017 and 2018. Assuming a flat LFPR, a forecast of 4.8% unemployment rate by the end of 2016 is compatible with average employment growth of 135k/month, substantially lower than the current pace of job growth.


As a reference, even a slowdown in employment growth from 2.3% currently to 1.5% yoy (the floor observed since mid-2011 was 1.8% yoy) would be equivalent to monthly employment gains of 178k and this would lead to a 4.4% unemployment rate by the end of 2016. Bottom line: LFPR needs to rebound (or job creation to settle at a very low level) for a 4.8% unemployment forecast to be attainable.

See detailed charts below:




The chart below shows unemployment rate (and short-term unemployment) and the recent tightening cycles (yellow). The short-term unemployment rate is at the lows.

Long term unemployment rate is improving faster. Moreover, the 'shadow' labor (i.e., the gap between U-6 and the headline unemployment rate) is also improving faster in the recent months. This is a clear sign that the labor market continues improving.