Employment Situation: Uglier than it looks

On the surface, the U.S. economy made better-than-expected job gains in October, a month disrupted by the partial government shutdown. The Federal Open Market Committee, however, will likely be more concerned with the details of the report than the headline number of job gains. Nonfarm payrolls increased by 204,000 in October, according to the Bureau of Labor Statistics, led by gains in leisure and hospitality and retail trade. August and September data were revised higher, totaling an expansion of 60,000 more than previously reported.

A few of the report’s highlights:

  • The unemployment rate was effectively unchanged, rising from 7.2% (with rounding) to 7.3% in October.
  • The government shutdown led 448,000 federal workers to be classified as unemployed.
  • The long-term unemployed (unemployed 27 weeks or longer) make up 36.1% of the unemployed.
  • The labor force participation rate declined to 62.8%.
  • The employment-to-population ratio fell to 58.3%.

While the payrolls number was a pleasant surprise, the rest is pathetic, even after adjusting for the government shutdown. The report gives little guidance to policymakers at the Federal Reserve (Fed). They are looking for a substantial improvement in the labor market, which could mean private sector payrolls expanding at around 200,000 per month. On that measure, we’re pretty close. They are also looking for improvements in the labor force participation rate and the number of long-term unemployed. On those measures, we’re not getting anywhere.

In a separate report, the Bureau of Economic Analysis reported that consumption expenditures in September increased 0.2% and prices rose 0.1%. Slow growth in consumption in September was a bit of payback from an acceleration of spending on motor vehicles and parts in August. Spending on nondurable goods increased 0.6% in September, and spending on services increased 0.2%. There’s continued slow growth and not much to push it higher or lower.

The initial market reaction to these reports suggests to me that investors are reassessing whether the Fed will taper in March 2014. It might be closer to December or January. When all is said and done, does it really matter, though? Most of the market damage from fears of a Fed taper are likely behind us.

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