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U.S. Gains Traction As 204,000 Jobs Added Last Month

Employers added 204,000 jobs in October, the Labor Department said Friday, far more than expected and the latest sign that the economy was building momentum even as the government shutdown took hold.

The jobs gain dwarfed the 120,000 that economists had forecast. August and September hiring was revised up by a combined 60,000. Meanwhile, 61.5% of industries boosted payrolls, the most since February.

Stocks rose sharply, rebounding from Thursday's sell-off, despite concerns that the Federal Reserve may pull the punchbowl sooner rather than later. The 10-year Treasury yield jumped to the highest since policymakers unexpectedly refrained from announcing a taper on Sept. 18.

"The economy's certainly not knocking the lights out but it's absolutely showing that there was strength going into the shutdown and it did not have as detrimental an impact as feared," said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management.

The private sector has been surprisingly resilient in the face of persistent head winds from Washington, Vail said. Even before the shutdown and debt ceiling drama, employers had to contend with the expiration of payroll tax cuts as well as sequester spending cuts.

"There's no way to get around the fact that taking purchasing power out of consumers hands is not good for the economy," said Robert Hughes, a senior research fellow at the American Institute for Economic Research.

The jobless rate edged up to 7.3% as the household survey found sharp drops in the number of people employed or in the labor force, for reasons that were not entirely clear.

Data Not 'Clean'

While analysts believe the effects of the government shutdown were less than expected, completely "clean" data probably won't be available until the December jobs report, which won't be out until early January.

Still, other recent data also suggest that the economy is gaining traction. ISM manufacturing and service-sector reports both signaled faster growth in October.

Manufacturers added 19,000 jobs in October, the third month ly gain in a row and the most since February. But hiring remains concentrated in low-wage sectors such as retail (up 44,400) and leisure/hospitality (up 53,000).

Government payrolls fell by 8,000. Furloughed federal workers were counted as employed.

Vail thinks that the Fed would start to taper as early as December, if not for the understanding that data could still be skewed. That makes January more likely, she said. But the Fed will need to provide much stronger forward guidance as the unemployment rate reaches its target of 6.5%, which could come as soon as next summer, she said.

But Sophia Koropeckyj, an economist with Moody's Analytics, said the Fed's hands were tied as long as federal fiscal wrangling continued. "A 7+ unemployment rate is still quite high and the economy is still in need of some stimulus," she said.

Yet Koropeckyj called Friday's report unequivocally strong, and said the underlying trend for job growth is probably about 175,000 a month.

That's in line with the 180,000 or so Vail expects in November.

"I'm not as concerned about when they start as how fast they go," Hughes said. Even if the Fed sees evidence of sustained labor market improvement, it will have to navigate choppy waters after tapering begins, particularly if the unemployment rate remains dynamic. By setting out specific targets, "they've put themselves in a box," he said, though policymakers can always point to "transient factors" for shifting direction later.

There are still plenty of pitfalls, despite recent progress. Consumer spending growth decelerated to a two-year low in Q3. The Reuters/University of Michigan sentiment index slid to a nearly two-year low Friday — though the IBD/TIPP Economic Optimism Index bounced back somewhat.

What's more, the deal that re-opened the government and raised the debt ceiling was short-term. Congress must reach a new deal soon or face another fiscal standoff.

Still, there's reason for optimism. "There's a lot of the econo my that will keep chugging along in spite of everything going on in Washington," said Koropeckyj.