- U.S. payrolls gained 261,000 jobs in October. While this is still positive, it represents a significant slowdown from earlier in the year.
- Wages grew at a 3.9% annualized pace over the previous three months.
- The Fed suggested they might slow its rate hike pace starting with their December 14 meeting, given the signs that job and wage growth are slowing.
Last week the U.S. Labor Department released its monthly Employment Report. This report is always a big deal for financial markets, but with Federal Reserve Chair Jerome Powell calling the jobs market "out of balance" last week, these employment reports are taking on even more importance.
Here's what was in the report and how it might impact your portfolio.
Payroll Gains Are Strong, But Slowing
According to the Labor Department, U.S. payrolls gained 261,000 jobs in October. While this is still a healthy job gain, it represents a significant slowdown from earlier in the year. In the first half of 2022, payrolls gained an average of 444,000 per month.
Wage growth also appears to be somewhat slowing. The Average Hourly Earnings measure rose by 4.7% over the last year, which is the slowest 12-month pace since August 2021. Wages grew at a 3.9% annualized pace over the previous three months, so the most recent data points to a further slowing trend.
This slowing of hiring and wages is a great sign for the Fed. The rapid pace of hiring earlier in 2022 was putting upward pressure on wages. Strong wage growth isn't bad, but we believe slower wage growth is necessary for inflation to subside. For wage growth to slow, we need demand for workers to cool to some degree. In other words, the labor market has been too strong, which is one of the causes of today's inflation.
Ideally, the pace of hiring would slow just enough to result in healthier wage growth, but not so far that we have a recession. Of course, we can't know if that's happening or not, but job growth in the 200,000-300,000 range is a step in the right direction.
Mixed Signals from Other Employment Measures
The unemployment rate ticked 0.2% higher this month despite the headline gain in jobs. This is because the Labor Department runs two separate employment surveys that are reported on the same day.
The first is the Establishment Survey that estimates the overall payroll number (+261,000). In this survey, companies are asked to report how many employees were on their payrolls in a given week.
Second is the Household Survey that tallies the unemployment rate. This survey asks individuals whether or not they have a job. That survey reported a 328,000 job decline in October.
The divergence between the Establishment Survey and the Household Survey is somewhat of a mystery to economists right now. However, it has gone on for too long to be a coincidence.
In the last six months, the Household Survey has averaged 30,000 job gains per month, while the Payroll survey has averaged 347,000 per month over that same period.
These two surveys aren't always the same, but they usually aren't this far apart. This is the biggest divergence over a 6-month period since 1995.
What might this divergence mean? The Establishment Survey suggests that hiring is slowing, and the Household Survey indicates that it is slowing even faster. So either way, this is a sign that the jobs market is cooling off, and the labor market is getting closer to the "balance" that the Fed seeks.
What Does This Mean for the Fed?
Last week the Fed suggested they might slow its rate hike pace starting with their December 14 meeting. These signs that the jobs market and wage growth are slowing are a major reason why.
A few months ago, inflation was very high, and there were no signs that the economy was slowing. Now, at least some signs indicate that the economy could be cooling. If so, that would give the Fed more confidence that inflation will start coming down.
So while this jobs report doesn't change anything for the Fed in and of itself, it is the kind of thing they want to see.
What About Financial Markets?
Stock prices rose sharply the day this employment report was released, which makes sense to us. While it usually isn't good news that hiring is slowing, today, investors are more focused on inflation than anything else.
The good news is that a slightly slower pace of job gains could mean we're closer to the end of Fed rate hikes. We have been arguing for the last several weeks that for stocks to start rising consistently, it will likely require some clarity about the pace of Fed rate hikes. So this kind of report is definitely a step in the right direction.
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