US employment growth improves

The October payroll survey showed a brighter picture of the labor market, both in faster headline job creation (171,000) and in upward revisions to previous months (84,000 extra jobs). Private payrolls added 184,000, their best month since February. Hurricane Sandy was too late in the month to have any discernible effect on the figures.

Average payroll growth over the last three months now stands at 170,000. There was good news in both construction and retail employment, consistent with the better news coming in from the housing market and with an improving consumer mood.

The unemployment rate did edge higher, as anticipated, from 7.8% to 7.9%, reversing part of September's drop from 8.1%. The household survey on which it is based showed strong job creation outweighed by an even stronger increase in the labor force. So, it showed an increase in the employment-population ratio and an increase in labor-force participation—that's good news, not bad.

Politically there was something for both presidential candidates to grab onto. President Obama can point to faster job creation, while Governor Romney can say that the unemployment rate is higher now than in January 2009 when the president took office. On balance, the report is better than expected, which should help the incumbent, but not sufficiently so to be a game-changer.

In the payroll details, manufacturing added 13,000 jobs, after losing 14,000 in September. Unusually, there were bigger gains in nondurables (8,000) than in durables (5,000). The relative weakness in durables may reflect its greater exposure to weak business investment demand at home and abroad. Overall manufacturing production-worker hours edged up 0.1%, suggesting a modest increase in manufacturing output during October. The manufacturing workweek and overtime both shortened slightly.

Construction employment rose 17,000—its best month since a warm winter–inflated gain of 18,000 in January. Residential construction jobs were up 5,000, while nonresidential jobs rose 16,000. It is difficult to split construction jobs accurately between these two categories, however, and it seems likely that housing rather than business construction is the key driver of rising construction employment.

Private services employment growth was 163,000, up from 141,000 in September. Retail employment rose 36,000, the strongest of three solid months in a row. Temporary jobs were an important swing factor, rising 14,000 after declining 12,000 in September. Healthcare employment climbed 31,000, a little faster than its norm. Food services and drinking places added another 23,000 jobs, a good month, but not quite as strong as the 40,000 added in both August and September. This sector has added an average of 27,000 jobs over the past 12 months. These are not high-paying jobs, but they do suggest strength in discretionary spending on eating out.

The government sector lost 13,000, after adding jobs throughout the third quarter. Federal jobs fell 6,000, while state and local jobs fell 7,000. Even with the small October decline, there are still 26,000 more state and local jobs now than a year ago, a notable stabilization after a loss of 247,000 jobs over the preceding 12 months.

The private workweek was steady at 34.4 hours, although September was revised down to 34.4 hours, from 34.5 hours previously. Total hours worked rose 0.1%, but the increase in hours for September was revised down from 0.4% to 0.1%, so that hours entered the fourth quarter on a weaker trajectory than it had seemed. It is still likely, though, that hours worked in the fourth quarter will beat the third quarter's weak 0.7% annualized growth rate.

Average hourly earnings were flat on the month and up just 1.6% year on year (y/y), running below the latest CPI inflation rate of 2.0%. Overall payrolls (wages multiplied by hours) were up only 0.1%, which suggests weak household income growth in October.

The unemployment rate, which comes from a different survey than the payroll figures, edged up from 7.8% to 7.9%. There was another big increase in employment as measured by the household survey, up 410,000, after climbing 873,000 in September. This month, though, the labor force increase of 578,000 exceeded the employment gain, so the unemployment rate ticked up. But it is still good news to see both the employment-to-population ratio rising (from 58.7% to 58.8%) and the labor-force participation rate rising (from 63.6% to 63.8%). The labor-force participation rate (the proportion of the adult population in the labor force) had hit a low point of 63.5% in August, its lowest level since September 1981.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—edged down from 14.7% to 14.6%. About half of September's jump in people working "part-time for economic reasons" was reversed. The proportion of long-term unemployed (27 weeks or longer) remained high, climbing from 40.1% to 40.6%.

Overall, the October employment report was a positive one. The three-month moving average of job creation, at 170,000, is much better than the 104,000 increase in the three months to July. The news was not all bright: the workweek was flat, as were hourly earnings, so the report pointed to only a weak gain in household incomes. But it generally suggests that improvements in domestic demand in housing and consumer spending are counter-balancing the weakness in exports and business fixed investment. The conditions are falling into place for an acceleration in economic growth if some of the uncertainties clouding the future (about growth overseas and fiscal policies at home) can be cleared up—but we suspect that these uncertainties will ease only gradually, making 2014 rather than 2013 the year most likely to see growth breaking to the upside from its present pace of around 2%.

by Nigel Gault