The big news this week is that employment came in much stronger than expected for October. After a disappointing report in September, markets were concerned that payroll growth had lost momentum, but with relatively strong upward revisions of the previous two months, those fears have now dissipated. It appears that the federal government shutdown had little to no effect on the nonfarm payrolls numbers.
The establishment survey counts workers as employed if they either worked or were paid for the pay period that included the twelfth of the month. Although most federal workers did not work during this period, they were paid, and thus counted as employed in this survey. The same cannot be said for the household survey, which should have classified federal workers on furlough as “unemployed on temporary layoff.”
However, it appears that some of those federal workers were actually wrongly categorized and put under “employed but absent from work.” Nonetheless, the number of unemployed persons increased over the month due to the rise in those on temporary layoff. As a result, the unemployment rate ticked up to 7.3 percent. There also was a substantial drop in the labor force participation rate, though this may also be misleading as survey participants may have indicated that they were neither employed nor looking for work while furloughed. Otherwise, solid private-sector employment gains are consistent with moderate growth in economic output.
Q3 Finishes in the Middle of the PackDespite upward revisions to employment in August and September, consumption growth, which grew at an annualized 1.5 percent in the third quarter, remained disappointing, though much of this was related to utilities spending. Wage and salary growth has been fairly muted, and the savings rate ticked up inSeptember, further constraining overall consumption growth.
The core PCE deflator, one of the Fed’s preferred measures of inflation, was 1.2 percent higher than a year ago in September, leaving plenty of room for it to continue quantitative easing. Overall, the GDP numbers were subdued. If one ignores the sizable jump in inventories, GDP grew only 2.0 percent, more in line with expectations than the headline of 2.8 percent.Nonresidential investment slowed some as businesses lowered their purchases of business equipment.
In the factory sector, September’s gain in capital goods orders was not enough to make up for the losses felt earlier in the quarter, and after excluding transportation, factory orders declined for the second straight month. However, residential investment kept its strong pace, which reinforces our position that the housing market recovery is still on solid ground despite the recent uptick in mortgage rates.
Government spending also eked out a gain for the quarter, thanks to state and local government expenditures making up for the cuts at the federal level.
The federal government’s finances remain a constant source of frustration, but state and localgovernments have removed much of the red ink that plagued their budgets since weak property values decimated a major source of tax revenue.
Mark Pinkowski
Senior Vice President
Wells Fargo Commercial Banking Tel 206-292-3231 Cell 206-849-6919 Fax 206-292-3595 mark.pinkowski@wellsfargo.com
