Good New in General, Concerns on Inflation

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.

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.

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.