We’ll put the jobs day caveats first because they’re bigger than usual this time: One month’s survey doesn’t tell us a whole lot about how the economy is doing, offers only a partial picture subject to major revisions, and so on and so forth. That’s even more true than usual this month because the report was influenced by the government shutdown, both in predictable ways (federal employees who were furloughed were to count as unemployed, on a temporary layoff) and unpredictable (the survey was taken a week late, so peoples’ memories of whether they were working might be hazy).
That said, this is a good report. It eases fears that the jobs recovery had petered out or at least downshifted significantly.
At 8:29 Friday morning the best guess of analysts was that the economy had added 138,000 jobs a month from July through October. But the October job growth number smashed their expectations, coming in at 204,000 net new jobs (versus the 120,000 forecast), and the report also revised August and September numbers up by a combined 60,000. Presto chango, the economy has added 174,000 jobs a month over that period.
And the survey of employers on which that data are based should not (in theory at least) have been affected by the government shutdown, or at least not much. Furloughed workers are supposed to still count as employed in that survey, though there could be some government contractors who were out of work due to the shutdown who did not count. But, if anything, that effect should make the numbers worse, not better.
The unemployment rate, by contrast, was deeply affected by the shutdown, and the survey of households on which it is based was, to use a technical term, screwy. It reported a 448,000 increase in the number of people unemployed on temporary layoff, which is what is to be expected as that includes furloughed government workers. But it also includes 720,000 people who were counted as dropping out of the labor force entirely, which is a downright outlandish number (the last time the size of the labor force fell that much in a single month was the end of 2009, when the economy was in much worse shape).
In other words, the caveats about being skeptical of this report apply much more strongly to the household survey, on which the unemployment rate is based, than they do the establishment survey, on which the payrolls numbers are based.
There are some important implications of that for policy. Federal Reserve officials have been on the lookout for signs that there is substantial improvement underway in the job market, which would be their cue to wind down their program of monthly bond purchases. Some officials have mentioned 200,000 jobs a month as their definition of “substantial improvement”
When the Fed meets in December, officials who are ready to taper bond-buying will have a much stronger case than they did at their last meeting, which came on the heels of a shutdown and two disappointing jobs readings. (Of course, by the time they meet on Dec. 17-18, they will also have the November jobs numbers in hand, so their action will be premised as well on what those show).
In other words, if the payroll numbers keep coming in the way they did in October, and the unemployment rate and related indicators prove to be reflections of a shutdown-induced anomaly, then the recovery is on track and the Fed may be ready to start winding down its era of interventionism. That’s why stock markets opened flat despite the better-than-expected payroll numbers.
In other words, with the Fed on a knife’s edge in deciding when and how fast to pull back on its bond buying, there exists an odd dynamic between markets and the economy in which down is up, dark is light, and good is bad.
Correction: This post previously said that the last time the labor force changed by as much as it did in October was in 2003; it was 2009.