The US labour market surprised analysts on Friday and the result is set to raise speculation of the Fed tapering in December. But they will want more information to be satisfied that the recovery is on a sustainable path.
US non-farm payrolls rose by 204,000 in October, much higher than the 120,000 predicted by the market. In addition, payrolls for August and September were revised upwards by a combined 60,000. There was an unusual amount of uncertainty surrounding the October jobs report because of the federal government shutdown from October 1-16. In particular, it was not certain how this would be treated in the statistics (A measuring stick for the shutdown's shock, October 21).
We will never know by what would payrolls have expanded by without the shutdown, but in all likelihood the government shutdown had little if any impact on the US labour market in October. For example, private non-farm payrolls rose at their fastest pace since February 2013.
Non-farm payrolls are now 1.5 million below their previous peak in January 2008 but the recovery still has a long way to go. To keep up with population growth, payrolls have to grow at 100,000 per month, which implies that non-farm payrolls are now around 8 million to 8.5 million below their population-adjusted peak. If payrolls were to keep growing at 200,000 per month (a bit faster than their average over the past three years) they would reach the population-adjusted peak in late 2020.
With regards to the government shutdown there is an important technical point that should be addressed. The payrolls and unemployment rate data are based on two separate surveys – the Current Employment Statistics (also known as the establishment or payrolls survey) and the Current Population Survey (also known as the household survey). The payrolls survey has a much larger sample size and is generally better at estimating conditions in the US labour market.
Each survey treated the government shutdown a little differently. In the payrolls survey, businesses report the number of people who either work or receive pay for any part of the survey pay period. Federal government workers who were temporarily laid off received back-pay when the shutdown ended. As a result, they were considered employed.
In the household survey, individuals are classified based on their answers to a series of questions about their activities during the reference week. According to the Bureau of Labor Statistics, federal workers during October should have been classified as unemployed on temporary layoff. As expected, temporary layoffs rose significantly but there was also a spike in the number of people who stated that they were employed but absent from work during the reference period. Effectively, respondents misunderstood the questions being asked. The BLS’s practice is to accept all answers as they were recorded so no adjustments for this were made.
This helps explain why the unemployment rate did not rise as much as expected in October. But it also means that the unemployment rate will not drop as much either when the effects of the government shutdown are reversed.
So while the payrolls data was largely unaffected by the government shutdown, the household data – which is used to derive the unemployment and participation rates – was. The unemployment rate rose slightly to 7.3 per cent in October, while the participation rate fell to its lowest level in 35 years. I expect the unemployment rate to tick down in November, while the participation rate should rebound to where it was prior to the shutdown in September.
Undoubtedly this was a fairly positive jobs report and certainly much better than expected, particularly when you consider the upward revisions for August and September. The question is: does this make it more likely that the Federal Reserve will begin tapering in December or early in 2014? The answer is yes, but with a firm asterisk. This job growth stills needs to be realised in a meaningful way through greater consumption (Taper waits for the American consumer, November 8) and we may not have sufficient evidence of this before the Fed meets in mid-December.
Although the labour market data was largely unaffected by the government shutdown, other data will not be so lucky. I think a lot will rest on the November jobs report and October retail sales. If both these results are solid, then the Fed may be convinced that the recovery is on a sustainable path.