Nonfarm Payrolls Rise 12k, Hard-Hit by Hurricanes

This morning, nonfarm payrolls rose by 12k in October, significantly shy of the 100k gain expected, weakness primarily reflecting the recent hurricanes. October’s 12k rise marks the weakest monthly print since December 2020 when the economy was in lockdown during COVID, pulling the three-month average down from 148k to 104k. September payrolls, furthermore, were revised down 31k to 223k, again likely reflecting the impact of the hurricanes with some companies late to report. Thus, with additional revisions to previous months, the?overall change in nonfarm payrolls (October data + net revisions) was -100k, the first monthly decline since December 2020.

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In the details of the report, private payrolls fell by 28k in October, the first negative print since December 2020. Goods-producing payrolls dropped by 37k, due to a 46k decline in manufacturing payrolls, the third month of decline despite an 8k rise in construction payrolls. Private service producing payrolls, on the other hand, rose in October, albeit minimally, up 9k following a 169k gain in September.

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Education and health payrolls led the gain in October, rising 57k following a 95k gain in September. Government payrolls rose 40k, the largest gain in two months, and information payrolls increased 3k in October, matching the gain in September. On the other hand, financial services payrolls were unchanged, while trade and transport payrolls slipped 1k, due to a 6k decline in retail trade payrolls. Also, leisure and hospitality payrolls declined 4k, the largest decline in six months, and professional and business services payrolls plunged 47k, due to a 49k drop in temporary help payrolls (the fifth consecutive month of decline).

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Household employment fell by 368k in October following a 430k gain in September. The labor force, meanwhile, decreased by a lesser 220k following a 150k rise in September. Thus, the unemployment rate remained at 4.1% in October for the second consecutive month, as expected.

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The labor force participation rate, meanwhile, unexpectedly declined one tenth of a percentage point to 62.6% in October, a four-month low. According to the median forecast, the participation rate was expected to remain steady at 62.7%.

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Also, average hourly earnings rose 0.4% in October, a tenth of a percentage point more than expected and following a downwardly revised 0.3% increase in September. Year-over-year, wages rose 4.0%, up from a 3.9% gain in September and the largest annual increase in five months.

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Finally, the average workweek remained at 34.3 hours in October for the third consecutive month.

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Bottom Line: A meager rise in October payrolls is certainly disappointing, but largely explained by the transitory impact of the recent hurricanes. Even with arguments of some emerging weakness in housing, construction and manufacturing, against the backdrop of ongoing strength in the consumer and positive business?investment resulting in a broader growth rate of near 3% – at least in hindsight July to September – coupled with a stellar jobs report of 223k in September, a six-month high, the storyline of a solid economy remains intact, perpetuating expectations for a soft landing as well as the need for a more tempered approach to monetary policy going forward.?

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For the Fed, the latest weather-related weakness can be easily dismissed. However, with just six days until the November 7th meeting, it also offers the Committee additional cover to continue with a second-round rate cut next week despite?stronger-than-expected data elsewhere in the economy and stubbornly sticky inflation.

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While an adjustment in conditions does warrant less firm policy as well as a further reduction in rates, another outsized 50bp move is clearly unnecessary with the base case returning to smaller 25bp cuts from here with a consideration, but not a commitment for policy action at every subsequent meeting.?

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Yesterday, personal income rose 0.3% in September, as expected and following a 0.2% increase in August. Consumer spending, meanwhile, increased 0.5% in September, a tenth of a percentage point more than expected and up from the 0.3% rise the month prior. Year-over-year, consumer spending increased 5.3%, matching the annual increase in August, while personal income rose 5.6% in September, a nine-month low.

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Adjusting for inflation, real consumer spending rose 0.4%, a tenth of a percentage point more than expected, and real income also gained 0.1%?in September for the fourth consecutive month. Over the past 12 months, real spending rose 3.1%, up from the 3.0% annual gain in August and the largest annual increase in nine months, and real disposable personal income gained 3.4% in September for the third consecutive month.

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The PCE rose 0.2% in September, as expected and following a 0.1% gain in August. Year-over-year, headline inflation increased 2.1%, also as expected and the smallest annual increase since February 2021.

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Excluding food and energy, the core PCE rose 0.3% in September, also as expected and following a 0.2% increase in August. Over the past 12 months, core inflation increased 2.7% for the third consecutive month, a tenth of a percentage point more than expected.

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The supercore PCE measure – core services excluding shelter – rose 0.3% in September and increased 3.2% on an annual basis, a downtick from the 3.4% gain in August and a two-month low.

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Bottom Line: Inflation continues?to improve and move closer to the Fed's desired 2% level, although some?underlying measures including the core have slowed the pace?of improvement.?As such, while the progress thus far has been welcome and warrants an ongoing pivot in policy, the Committee should not lose focus as a return to price stability is not yet a forgone conclusion.??

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Also yesterday, initial jobless claims unexpectedly fell 12k from 228k to 216k in the week ending October 26, the lowest since May as the temporary impact form the hurricanes appears to already be dissipating. The four-week average, meanwhile, dropped from 239k to 237k. Continuing claims, or the total number of people claiming ongoing unemployment, dropped from 1.89M to 1.86M.

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Additionally yesterday, the Employment Cost Index (ECI) rose 0.8% in the third quarter, down from 0.9% in Q2 and the smallest increase since Q2 2021.

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Next week, the economic calendar is centered on the Fed’s November FOMC meeting. Following an outsized 50bp cut in September, the Fed is widely expected to continue along a path to easier money policy albeit at a reduced pace with a more tempered pace of 25bps next week.

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The September dot plot indicated the majority of officials see an additional 50bps in cuts this year and 100bps more next year, although nearly as many indicated a reduced forecast of just 25bps or no further cuts in the current year. With no updated release at the November meeting, market participants will be parsing through the statement and listening closely to the press conference for any indications as to what Fed officials are forecasting for the final policy meeting of the year and looking out further to 2025.

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Aside from the Fed, the economic calendar begins on Monday with a look at September factory orders, followed by the final September durable goods orders report.

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On Tuesday, we take a look at the September trade balance, and the ISM Services Index for October. The ISM Services Index rose from 51.5 to 54.9 in September, surpassing the expected increase and reaching the highest reading since February 2023.

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This month, however, the services index is expected to decline from 54.9 to 53.5 in October, remaining in positive territory but potentially marking a two-month low.?

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Turning to Wednesday, weekly mortgage applications will be released, followed by the final October print of the S&P Global U.S. Services and Composite PMIs.?

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Later in the week, on Thursday, weekly jobless claims,?along with Q3 nonfarm productivity and unit labor costs reports, wholesale inventories, and consumer credit.

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Finally, on Friday, we take a last look at the November University of Michigan Consumer Sentiment Index widely expected to be revised slightly higher from 70.5 to 70.6.

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-Lindsey Piegza, Ph.D., Chief Economist