More questions than answers in the October jobs report

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Phoebe White: Welcome to Research Recap on J.P. Morgan's Making Sense. I'm Phoebe White, head of U.S. Inflation Market Strategy. And today I am joined by Mike Feroli, our chief U.S. economist. And we are here to talk about takeaways from the October U.S. employment report, as well as the path ahead for the economy and the Fed. Mike, thanks so much for joining .

Mike Feroli: Thanks for having me.

Phoebe White: So, Mike, we knew this would be a messy report. What were your high level takeaways?

Mike Feroli: So it was messy. We had a disappointing 12,000 gain in overall nonfarm jobs. We don't know precisely how much of that to assign to the combined effects of the hurricanes and the various strikes. It was below expectations. You know, I think when we looked at the totality of the report, it was, again, besides that headline miss, pretty close to expectations, perhaps a smidge to the soft side when we looked at the details. But nothing too alarming.

Phoebe White: So let's talk about the details a little bit more. So you had estimated going into the report that the hurricanes and the strikes would be worth about 80K. Is there anything in the details that tell you that that was an appropriate estimate or could be larger?

Mike Feroli: Hard to know for sure at this point. You know, we know the direct effects of the strikes were a little over 40,000. There could, of course, be indirect effects through suppliers. And then really, all we get in today's report is the industry detail, which doesn't really give us much flavor of how much the hurricanes subtracted. We do know that the impact on jobless claims was probably somewhat less than we were thinking, but I think we really have to wait till the state level data in three weeks time to have a better sense of of the hurricane effect.

Phoebe White: Okay. So still a lot of uncertainty. But let's talk about, I guess, what signals you're taking from the broader swath of data. Of course, it's been hard even to smooth through the monthly prints. Three month moving average of payroll growth has dropped from 186K last month to 104,000. So that's difficult. But we had, let's see, a weaker JOLTS report but tick down and claims tick up and labor market differential. What are, I guess, are the broader signals you're watching for?

Mike Feroli: You know, I guess it looks like the broad story of the labor market cooling coming into better balance still feels like that story is intact. As you mentioned, job openings continue to move down. Number of quits continue to move down. We had an unemployment rate that was unchanged, though the higher precision almost rounded up a 10th. So it looks like things are cooling. But again, not in a way that would be alarming at this stage. So we think that's the main message that from all the data we're seeing this week.

Phoebe White: And what is, I guess, the growth signal that you would extract from the data? You mentioned tick up in the workweek, but also decent strength in average hourly earnings. How are we tracking?

Mike Feroli: So workweek, Well, the prior month was revised up, so it was unchanged actually from the upward revised number last month. Average hourly earnings ticked stronger than expectations. But again, that was revised down last month and the month before that. On wage growth, again, it kind of looks like we're in a sweet spot between today's number and the ECI report suggests around, you know, high 3 to 4% on wage growth, which is, you know, good numbers, not worrying to the downside, not to inflationary. So right now, it feels like we're in a sweet spot on a lot of measures. And I think on growth, too. Of course, the main message we usually take from growth is the growth in hours worked, which of course is from the establishment survey and therefore it could be distorted by the, again, the strikes in the storm. You know, but I think the broad picture is it looks like we're continuing to have pretty good momentum heading into the fourth quarter, maybe not as strong as the third quarter, but third quarter was very strong in GDP terms. But we think we're still on pretty solid footing growth wise as we head into Q4.

Phoebe White: So you mentioned the establishment survey was probably more distorted by the weather. Let's talk about the household survey and dig into the unemployment rate number. So unrounded, no change at 4.1%, but actually unrounded ticked up almost a full 10th. Anything you're seeing in the details there in terms of the flows, data or anything like that?

Mike Feroli: You know, it looked like you had a little bit of a decline in the job finding rate, a little bit of a tick up in that the ratio of job losers to job leavers, permanent job losers was actually at a cycle high. So, you know, it does look like the details show a little bit of further cooling as has been the case for most of this year. We did have, unfortunately, a tick down in the participation rate, which had been, you know, some of the really good news over the past two or three years had been prime age participation moved up to a multi-decade high. Last two or three months has come off about a half point. So that's, you know, not great for anyone, but too soon to say, I think, whether that's a new trend. But overall, I would say the details of the household survey, which are getting less distorted, presumably by the strikes and storms, show, you know, some further cooling along the lines of what we had been seeing really over much of the first part, first three quarters of the year.

Phoebe White: Okay. So we do have a Fed meeting coming up next week. I guess the details of this report should leave the Fed on track to cut. Anything else to look out for at that meeting?

Mike Feroli: Not really. Yeah. So first of all, you know, I think there's little debate about the 25 basis point cut for next meeting. Fed officials had been signaling that before the blackout period. This number, I think, would be consistent with further, you know, rate cuts. I suspect they won't give too strong a signal about their plans going forward. Of course, in addition to the usual uncertainty, we'll have the election next week, which adds another wrinkle to the panoply of uncertainties facing policy. So we don't think they're going to give too strong a signal about their plans in December or beyond that.

Phoebe White: Right. Okay. And we may not even know the outcome of the election by the Thursday meeting, we’ll see. But I guess just looking out to December and January, I mean, the question we keep getting asked is what would it take for the Fed to pause? Do you think that the outcome of the election could matter for Fed policy here the next few months?

Mike Feroli: Yeah. So, the bar for a pause, I think, was probably raised by today's number. Now you have only one jobs report between now and the December meetings, so that would really have to be a blowout, I think along with perhaps two strong CPI, is to kind of get them to be thinking about a pause. I think everything's up for grabs when it comes to January. And would the election matter for as soon as December? It's possible, but I think the Fed won't be trying to set policy in anticipation of federal government policy, but rather would react to policies once they've been implemented, whether it's on trade, immigration or spending or taxes for that matter.

Phoebe White: Certainly a lot of questions there still. And you look at the moves in rates markets and I think it tells you there is this heightened sense of policy uncertainty, seeing big swings in ten year yield and the front end of the curve. The market has gone from pricing a terminal fed funds rate around 270 now around 350. Ten year yields are up about 60 basis points just over the last six weeks. I think a reflection of that Fed repricing, but also higher term premium ahead of the election. Certainly, you know, a lot of that risk here just in the next couple of weeks, next week, not only the election and the Fed meeting, but sandwiched between those events, we do have long end Treasury supply. So I think there we are in for a period of elevated market volatility here as we look ahead. I think that's a good place to close. Mike, thanks so much for joining.

Mike Feroli: Thanks for having me.

Phoebe White: And thanks to our listeners for tuning in. We hope you'll join us next month. For more research insights, visit jpmorgan.com/research.

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