Employers added 250,000 jobs during October, continuing the healthy pace of hiring that we’ve seen over the last several years. In fact, jobs have been added for a record 97 consecutive months. The unemployment rate was steady at 3.7%.
The main headline in the report however, and in most papers over the weekend, was wage growth. Average hourly earnings rose 3.1% year/year, the largest gain since 2009. Earlier last week the employment cost index, another proxy for worker compensation, showed a tick up as well.
Many economists have been waiting for wage growth to emerge after years of steady hiring. And while a print above 3% may indicate some tightening in the labor markets, we are still far away from the 4%+ figures seen in past economic expansions. Of course, those types of wage gains were present during periods of higher inflation. As we discussed on our recent Q3 webcast in early October, wage growth tends to coincide with inflation, not lead it. With inflation around 2%, it makes sense that wage growth, while increasing, is still well contained.
We watch these figures with great interest as they have implications for the Federal Reserve. A healthy labor market and inflation at the Fed’s 2% target makes it very likely that the Fed will continue on its steady path to policy normalization. This means another four rate increases by the end of 2019. It also means that with economic fundamentals at the Fed’s targets, market volatility, like what we saw in October, will not necessarily knock the committee off its path. We will hear from the Fed this week after its November meeting. All indications are that the committee will hold rates steady and will next raise the fed funds rate in December.
With these dynamics in play our broad market outlook, which is highlighted by a flat yield curve environment and pockets of market volatility as policy normalization takes place, remains unchanged.
Source: JP Morgan, WSJ