The headline number for the jobs market came in as a big miss, with US companies adding just 156,000 jobs. Economists were looking for 172,000. Meanwhile, the unemployment rate ticked up from 4.9% to 5.0%.
The report, however, reflects underlying economic strength.
And all this means good things for stocks. Why? The disappointing headline doesn’t increase pressure on the Fed to raise rates near-term, something that has caused at least temporary downward pressure on indices. But the underlying economic strength reflects long-term improvement. In other words, the so-called “Goldilocks scenario”—which the latest jobs report fits perfectly into–continues to mean good news for the markets, according to Renaissance head of economics Neil Dutta.
“This is a good number for the equity market,” Dutta said. “Steady growth in aggregate hours and gains in earnings imply solid consumer spending. Meanwhile, the unemployment rate ticked up …This allows the Fed to move slowly as it implies rising potential growth,” Dutta said.
Incomes up, labor force growing, housing market strong
Incomes in September grew the most since January, according to Renaissance Macro Research. Aggregate hours worked in September rose 9.4% month-over-month while average hourly earnings rose 0.2%. Total private income rose 0.6%, up 4.3% over the last year. Compared to headline inflation growth of 1.1%, this implies health gains in real income, according to Dutta. Average hourly earnings grew 2.6% over the last year and 2.8% so far this year.
Also importantly, the closely watched participation rate rose to 0.1 percentage points to 62.9%, the highest level since March. The prime-age participation rate (those aged 25 to 54) rose 0.2 percentage points to 81.5%, the highest level in almost three years.
In fact, as Deutsche Bank’s Torsten Slok pointed out, the jobs report marked a decline in the number of people outside the labor market for the first time in almost 20 years.
This reinforces that we have reached full employment, given that the participation rate reflects what what we saw in the mid-1990s and 2006 (both periods of full employment), according to Slok.
“The fact that there are fewer outsiders in the labor market to come in and take jobs from insiders has given more bargaining power to insiders and resulted in more upward pressure on wages, in particular for non-managers,” he said.
Housing market strength remains an important driver for the labor market as well. Residential construction jobs grew for the fourth straight month, up 15,700. Real estate employment rose 4,900, up 3.2% over the last year. And architectural and engineering services jobs rose for a fifth straight month, this time by 1,500. And wages in construction are also surging, something the home builders have discussed on recent conference calls as well.
Leading indicators strong
Meanwhile, leading indicators of labor market activity rose. Temporary help employment rose 23,000 in September, up three of the last four months and marking the strongest one-month gain since December to a new cycle high.
Additionally, the workweek—which, as Renaissance Macro Research pointed out, tends to rise ahead of actual headcount—extended to 34.4 hours from 34.3 hours.
Status quo for Fed
Despite all this strength, the lackluster headline number takes pressure off the Fed for the upcoming meeting in November, according to analysts.
After all, this may be the least important jobs report of the year. With the next Fed meeting slated just about a week before the presidential election and with no press conference, expectations are low for any action then—odds of a hike in November sank to 10% from 15% after the data came out. (Fed Chair Janet Yellen has repeatedly defended the Fed’s separation from political considerations, responding to attacks from Republican presidential candidate Donald Trump).
This comes despite increased calls for a near-term hike, from the likes of Cleveland Fed President Loretta Mester, who was one of the three dissenters calling for a hike in the Fed’s most recent September meeting.
Odds of a hike during the Fed’s December meeting increased to 66% on Friday, up from 63%.