A much-better-than-expected jobs report Friday, combined with other strong economic indicators, raises the chances that the Federal Reserve may pull back on its stimulus for the economy sooner rather than later.
Mainstream economists had expected job growth in the range of 120,000 in October because of last month’s 16-day partial federal government shutdown, so the rise in non-farm payrolls by 204,000 was a bit of a shock. And it came a day after the Commerce Department had reported that the economy grew at a faster-than-expected annual rate of 2.8 percent from July to September.
“These job gains were certainly beyond my wildest expectations,” said Scott Anderson, the chief economist for San Francisco-based Bank of the West and an analyst who’s been less optimistic than most. “It looks like the economy gained some momentum, despite the government shutdown.”
The report came as the latest measures of manufacturing, international trade and services have come in strong too, and show the economy to be more resilient than thought. The Federal Reserve had cited uncertainty over the shutdown as one reason it was continuing its stimulus efforts to bolster the economy, and the recent data are calling that into question.
Conventional wisdom was that the Fed would begin pulling back support in March, but now many analysts think it might begin in December.
“This argues for a more aggressive Fed,” Anderson said.
Some economists cautioned, however, that the Fed might focus more on the slight uptick of the unemployment rate to 7.3 percent and wait to see more improvement there.
“We still think that March is going to be the earliest when we hear anything from the Fed on tapering,” said Anika Khan, a senior economist at Wells Fargo Securities in Charlotte, N.C.
Within the Labor Department’s jobs report Friday were signs that hiring was broadly spread across sectors.
In fact, the only broad sector to post declines in October was government, which shed 8,000 jobs. Absent government, private-sector payrolls grew by 212,000. And statisticians revised the August and September jobs reports upward by a combined 60,000 jobs.
Because government workers received back pay after the shutdown, they were counted as employed during the month.
Where it got more complicated, however, was in determining the unemployment rate. That’s done through a survey of households. and while the unemployment rate reportedly rose a tenth of a percentage point, there’s reason to think it might have gone down instead.
That’s because a large number of respondents to the household survey, 448,000 of them, reported that they were “unemployed, on temporary layoff.” These were government workers or people who did contract work with the federal government.
“We estimate the unemployment rate was 7.0 percent excluding the impact of the shutdown,” economists for forecaster RDQ Economics said in an investment note.
One of the mysteries in Friday’s report, however, was the sharp drop in the labor force participation rate. Already at a 35-year low, the rate fell by an unusually large four-tenths of a percentage point in just one month, to 62.8 percent. That’s more than 700,000 people exiting the labor force.
“Labor force participation should not have been affected by the government shutdown,” Keith Hall, a George Mason University researcher who’s a former head of the Bureau of Labor Statistics, said in an analysis. “It is unclear what caused the sudden change.”
The leisure and hospitality sector led hiring in October, adding 53,000 jobs. Business and pleasure travel affects this section, which suggests that companies and ordinary folks were inclined to travel and spend money last month.
The professional and business services sector, generally better-paying white-collar jobs, added 44,000 positions.
Retailers also posted a strong 44,400 new payroll jobs in October, a good sign going into the holiday season.
“Today’s report puts the U.S. economy in a very positive light heading into the fall and winter seasons,” Jack Kleinhenz, the chief economist for the National Retail Federation, said in a statement. “While retailers and businesses are hiring, consumers remain cautious, but we remain steadfast in our belief that consumer confidence and spending will improve.”
The latest reading of consumer confidence, however, came in subdued on Friday. The Thomson Reuters/University of Michigan index of consumer sentiment fell to its lowest level in more than two years. It suggests that while the shutdown didn’t hurt hiring, it did weigh on consumers who feared losing their jobs and likely dialed back their spending.
And for the second straight month, manufacturers expressed disappointment in relatively slow growth. The construction and manufacturing sectors continued to add jobs, 11,000 and 19,000, respectively, last month. On a year-over-year basis, manufacturers have added 55,000 workers.
“Hiring growth for the sector has been disappointingly slow,” Chad Moutray, the chief economist for the National Association of Manufacturers, said in his blog Shopfloor.org.