The October employment report was significantly stronger than expected. Expectations beforehand had been that the economy would have created 400-450k jobs. Instead the economy gained 531k jobs, substantially above those expectations. 

In addition, there were big upward revisions to the prior two reports which had been rather dreary. Job growth in September was revised up from a tepid 194k to a warmer 312k, while August was revised up from 366k to 483k; overall the revisions added 235k more jobs than previously estimated.

Government jobs fell for the third consecutive month, losing a total of -147k over that period. More than all of it was due to a category called “Local government educational services” which are basically public schools. Either the Bureau of Labor Statistics (BLS) seasonal adjustments haven’t been tweaked to account for new patterns in school openings, or there really are fewer teachers and staff returning to school. It’s impossible to tell just from this data.

Private sector jobs were a blowout, gaining 604k, far above expectations. Gains were widespread across virtually every industry. 

  •          Construction gained 44k, the most since March.
  •          Manufacturing gained 60k, the most since June 20th when there was a huge gain due to businesses re-opening.
  •          Retail rose for the third straight month, gaining 35k.
  •          Professional and business services gained 100k
  •          Leisure and hospitality gained another 164k in October. Of the 18 million jobs regained since the shutdowns in 2020, 7 million of them were in leisure and hospitality.
The unemployment rate fell from 4.8% to 4.6%. The more important labor force participation rate, unfortunately, stayed stuck at 61.6%, well below the pre-pandemic era of 63.3%. The last time it was this low was in January of 1977, almost 45 years ago.
nfibsurvey - sept2021
Perhaps the most important information in the report though was the wage story. Average hourly earnings are now growing at 4.9% y/y, almost twice the pre-Covid average of 2.5%. If we compare earnings now to May-20 when the economy started to open back up, we see that earnings across all industries rose 5.0% while wages in the leisure and hospitality industry rose a very steep 14.4%.
Pressure on wages emanates from a supply and demand imbalance. For instance, job quits hit another record high last month. There were 10.4M job openings last month but only 6.3M job hirings, a gap of 4.1M jobs, surpassed only by the prior month’s 4.3M.
The National Federation of Independent Business (NFIB) survey also shows wage pressures. The net percentage of respondents who said they had already raised compensation in the past three months hit another record high, as did those who said they were going to raise wages in the future.
job openings-sept2021
Inflation also appears in the ISM surveys. The index of pricing pressure in manufacturing is very high at 86 compared to the long-term average of 62. In services (80% of the economy) the index of pricing pressure is at 83, the second-highest ever. 
job openings-sept2021
By the way, that ISM services survey showed record-high levels of new orders and backorders. On one hand that’s very good news as it clearly indicates lots of work in the pipeline, supporting economic activity for months to come. But it also demonstrates once again that economic growth and potential for new business is being suppressed by… you guessed it… supply chain snafus. It’s an insipid, wearying message that we are likely to be hearing for quite some time I’m afraid.
continuing jobless claims - sept2021
As we know from last week’s disappointing GDP report, the economy fell asleep at the wheel in Q3. It shows up very clearly in our favorite high-frequency data below. In all four of the charts, you can see a red arrow pointing down in Q3. At that time the delta variant was soaring, and it’s not coincidental that all four of those charts measure face-to-face activity. But you can also see the upturn in those measures now, which is one of the reasons why we expect to see a better economic performance in Q4.

Finally, the Federal Reserve met and as expected announced that it would begin the ‘tapering’ of its asset purchases, or virtual money printing, in December and end it next June or July 2022. It’s a sign that the Fed feels like the credit markets no longer need more support than they have had. The message had been so well-telegraphed that the financial markets barely gave the news a shrug. Chairman Powell repeated that there would be no increase in interest rates until the economy was at full employment, but he also suggested that the economy could reach full employment by H2-22. And once again, the current bout of inflation was described as transitory if for no other reason than the supply chain would clear up at some point.

So there’s a lot of good news. The high-frequency indicators are showing a rebound in Q4. The October employment report was very strong, and very good news. But we still have a long way to go in the labor market, and the supply/demand imbalance is clearly driving wage inflation which is showing up in many measures. 

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