The October Jobs Report: A Big Picture Perspective

Yesterday the October jobs report came out and it showed a modest increase in the unemployment rate from 3.5% to 3.6%. A number which is still well below what economists call the natural rate of unemployment and so indicative that the economy is still going on strong.

To buttress this further the establishment survey that tracks the change in the number of jobs also showed that we added 128,000 jobs, further information provided in the BLS survey suggested the downward trend in jobs added was due to lower Federal jobs as the government shed temporary jobs associated with the census. Well, this was a modest 3000 jobs lost in the Government sector.

Further investigation into the data shows that Manufacturing which has slowed down considerably over the past couple months shed about 36,000 jobs, and many other industries with a few exceptions either shed jobs or added fewer jobs than the previous month (September) where the total jobs added overall was higher at 180,000, which in turn was down from August where the jobs added was 219,000.

Two things worth giving serious thought to...

The unemployment rate is a lagging economic indicator. It is still very low, which is a good thing for the economy, but the fact that it ticked up, albeit by 0.1%, should be suggestive that we may have had a turning point a few months back, perhaps suggestive of when manufacturing began to show initial signs of slowing down.

Three months of successive decline in the number of jobs added could be interpreted in one of two ways. The jobs market may be saturated as we would expect of an economy operating at full employment, thus having a reduced scope for jobs growth. It could also be suggestive of an economy that is starting to slow down perhaps because business expectations have not been matched by an increase in spending sufficient to run down their inventories, which has in turn led them to begin to cut back on production.

The First Estimate of GDP growth for the third quarter

A few days back the Bureau of Economic Analysis released their first estimate of GDP growth for the third quarter of the year. The economy grew at 1.9%, slower than the second quarter growth of 2%, which in turn was much slower than the very fast 3.1% growth reported for the first quarter of the year.

Further, the driver of economic growth for the second quarter which was consumer spending decelerated considerably from 4.6% to 2.9% in the third quarter, while investment spending continued to decline, with spending on structures falling by 15.3% in the third quarter, following a second quarter decline of about 11%.

What does this mean for the overall picture within which the October jobs reported should be interpreted?

The economy is starting to sputter. We have already seen this for a couple months now in Manufacturing and perhaps in some financial market predictors like the yield curve which inverted about a a month ago, and while the spread has returned to normal, still suggests that its predictive capability for a recession in the near term is still somewhat valid. Policymakers realize this and the Fed cut interest rates again in its last meeting a few days ago, but as I suggested in a recent article, perhaps they should have followed the President's suggestion and been a bit more aggressive.