By Jason Simpkins
Employers added 166,000 employees in October, more than double analyst forecasts, the U.S. Labor Department reported Friday.
Most economists had only expected an increase of between 80,000 and 85,000 jobs. The report helped to ease concerns that the meltdown in mortgage markets and the heavy toll taken on homebuilding would spread to the broader labor market. It will also give the Federal Reserve a break from rate cuts in the face of growing inflationary pressures.
“The labor market continues to be inconsistent with fears of a recession,” said Dean Maki, chief U.S. economist at Barclays Capital and a former senior economist at the Fed, told Bloomberg News. “This report will increase the Fed's conviction that it should keep rates unchanged in coming months.”
Service industries, which include banks, insurance companies, restaurants and retailers, experienced the largest workforce expansion. They added 190,000 workers in October, after taking on 127,000 new employees in September. Government payrolls grew by 36,000 during the month, after rising 23,000 in September.
Factory payrolls took the biggest hit, dropping 21,000 after decreasing by 17,000 in September. The construction and lending sectors lost 5,000 jobs each, while finance, a sector that has been hit hard by the credit crisis, saw 2,000 payroll additions last month. The unemployment rate held steady at 4.7%.
On Wednesday, the Commerce Department reported a surprising 3.9% GDP growth rate for the third quarter, outperforming analysts’ estimates by a large margin. The employment report is further evidence that the U.S. economy is holding the line, despite the collapse of the housing market and credit crisis.
Every Silver Lining Has a Dark Cloud
While the report is overwhelmingly positive, some economists question the validity of the gains in the latest report, which will be subject to further revision.
“People got too excited about the job loss in August and they're getting too excited about this gain,” John Silvia, chief economist at Wachovia, said in a recent CNNMoney report.
It’s clear that Silvia and many other analysts expect much of this optimistic reading will soon be revised away, the same way that the 4,000 job loss originally reported in August has been revised twice, and is now regarded as a 93,000-job gain.
“It's dealing with the month-to-month volatility in the sampling process,” Silvia said. “Clearly the 166,000 overstates growth. When the final numbers finally come in, it will probably be closer to the 80,000 gain everyone was expecting.”
Certain specificities within the report also came under scrutiny.
“The one warning sign in the report was a drop in trucking jobs,” said Joel Naroff, President and Chief Economist of Naroff Economics. “If we are not shipping goods across the country, there may be more weakness than meets the eye.”
Both Naroff and Silvia questioned the spike in public education hirings, which reportedly totaled 35,000. The figure is likely the result of the Bureau of Labor Statistics catching up with seasonal gains from the start of the school year.
Regardless of certain inconsistencies the report still stands as a positive signal concerning recession and the U.S. economy. At least, that’s how the Fed will see it…
The positive nature of the report suggests the economy, at the very least, isn’t falling apart. That means the Fed, which faced a backlash of criticism after slashing rates Wednesday, will be able to abstain from further rate cuts in the near future.
Fed policy makers cut the interest-rate target for loans between banks by a quarter percentage point to 4.5% on October 31. This followed a half point rate cut at the end of September.
The Federal Open Market Committee (FOMC) said in a statement that the cuts were meant to “help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.”
However. many analysts second-guessed the decision, suggesting the move would have an adverse effect on the value of a dollar and, in conjunction with high oil prices, fuel inflation.
Core prices, which exclude food and energy costs, rose at a rate of 1.8% in the third quarter, a 0.4% increase from the second quarter. That may still be in the Fed’s comfort zone between 1% and 2%, but whether it will remain there remains to be seen.
News and Related Stories:
- U.S. Department of Labor:
Bureau of Labor Statistics
- Money Morning:
U.S. Economic Growth Accelerates in Turbulent Third Quarter
- Money Morning:
Layoffs Hit an All-Time High in Financial Services Sector
- Money Morning:
U.S. Investors Look Past Mortgage, Profit Challenges to Fed Interest Rate Meeting This Week
Jobs pick up but red flags remain
- Bloomberg News:
U.S. Economy: Employment Growth Exceeds Forecasts