Three Job Signals for the Fed to Consider, Plus a Cautionary Indicator – By Reuters

By Howard Schneider

WASHINGTON (Reuters) – The October jobs report likely brought relief to Federal Reserve officials who are hopeful that the U.S. economy can transition smoothly away from a period of high inflation and rapid job growth without slipping into a recession due to their rate hikes and stricter credit conditions.

However, the monthly data comes with a caveat: the headline job gains of 150,000 were influenced by a strike from the United Auto Workers.

When factoring in this strike, the job growth figure aligns closely with the pre-pandemic average of 183,000 jobs per month, maintained from 2010 to 2019. This suggests a return to a more "normal" pace after a period of extraordinary job increases.

Revisions to previous months’ figures for August and September also revealed lower numbers, reducing the total by 101,000 jobs. The initial strong estimate for September of 336,000 jobs was adjusted down to 297,000, while August’s count was revised to 165,000, both below the average seen before the pandemic.

Wage growth has also shown signs of slowing, which many Fed officials believe is necessary for inflation to reliably decrease from its current rate of 3.4% towards the target of 2%. The Fed is generally comfortable with wage growth around 3% but becomes anxious when figures exceed this. As of October, annual wage growth fell to 4.1%, continuing its downward trend, while the monthly gain of 0.2% equates to an annualized rate of approximately 2.4%, falling within the Fed’s target range.

The unemployment rate gives officials breathing room to see the economy as gradually adjusting to the pandemic’s impact, rather than being trapped in an inflationary cycle that would necessitate further rate hikes or dangerously heading towards recession—a situation that would increase political pressure on the central bank and jeopardize hopes for a "soft landing."

The ultimate outcome of inflation is still uncertain. Some economists maintain that unemployment must rise more significantly for price pressures to ease fully, arguing that economic "slack" in the form of lower demand for goods, services, and labor is essential.

Nevertheless, inflation seems to be declining with minimal negative impact on employment, thanks to improved supply chain conditions and overall supply side enhancements that allow the economy to produce more without intensifying price pressures.

Not all aspects of the report are cheerful.

During a press conference following the Fed’s recent policy meeting, Fed Chair Jerome Powell noted that the increase in labor force participation—those employed or seeking work—indicates the economy is moving toward a more balanced state. More individuals in the labor market enable businesses to fill a significant number of vacant positions while reducing competition for workers, which has previously led to rising wages and high turnover rates during the pandemic.

Although the monthly statistics on the labor force can fluctuate, there was a decrease of over 200,000 in October, marking the first decline since a slight drop in April and the steepest since June 2022.

If an increasing labor force coincides with a reduction in job openings, it could signal a more balanced job market. However, if consumer spending remains robust and continues to drive high numbers of job vacancies, a slowdown in labor force growth could rekindle wage pressures.