A Better Wind for October Jobs


By Michael Englund and Rick MacDonald After a subpar performance in the past couple of months, the U.S. job-making machine kicked back into high gear in October. The

employment report for the month released on Nov. 5 showed a surge in the headline nonfarm payrolls number of 337,000 -- far higher than economists' median forecast of a 180,000 rise. Our forecast at Action Economics had been for a gain of 200,000, though we did see some upside to that figure (see BW Online, 11/4/04, "Expect Some Good News on Jobs").

The data for the prior two months were revised higher as well -- to gains of 199,000 in August and 139,000 in September. Were it not for a seasonal adjustment shift that boosted August and September, and hence depressed the October gain, the October increase would have been 427,000 -- 90,000 above the reported figure.

EARNINGS UPTREND. It's increasingly apparent that the recent hurricanes that swept Florida and the Southeast depressed hiring in August and September -- despite the Bureau of Labor Statistics' assertions in the prior report to the contrary. Indeed, what happened this year isn't that different from the effects of prior hurricanes.

Elsewhere in the report, the unemployment rate rose to 5.5% (vs. the median forecast of 5.4%) from 5.4% in the prior month. The average workweek remained at 33.8 hours in October, with some industries (e.g. manufacturing) continuing to disappoint.

The October gain of 0.3% in hourly earnings has finally produced an identifiable uptrend, which bodes well for the outlook for other data. We now assume 0.6% gains in both personal income and industrial production in October, as the monthly data recover from hurricane distortions. These gains should leave industrial output poised for a 6% growth rate in the fourth quarter, while disposable-income growth recovers to the 5.2% area, following a dip in the third quarter to a slim 2.5% rate.

RISING PAYROLL AVERAGE. October job growth showed widespread strength. Construction jobs boomed 71,000 in post-hurricane rebuilding efforts. Private service jobs surged 231,000. And government payrolls jumped 41,000.

But the manufacturing sector continues to stumble. It shed 5,000 jobs on the month. The factory workweek and overtime measures declined by 0.1 hour, to only 40.7 and 4.5 hours, respectively. At Action Economics, we've lowered our expected industrial production gain for October from 1% to 0.6%.

Year-to-date average monthly payroll gains rose to 198,000 in October, from September's revised 183,000. We will assume a 160,000 payroll gain in November, and a 194,000 average monthly payroll gain for the year. Hours worked are poised for the same 3.1% growth rate in the fourth quarter as was seen in the third. The data support our 4.5% fourth-quarter gross domestic product estimate, following the solid 3.7% gain in the prior period.

Overall, the data should provide undeniable evidence that the job market is continuing to strengthen. This bodes well for economic growth, and it also suggests the Federal Reserve will likely keep raising interest rates at its policy meetings for the foreseeable future. Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics


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