October Employment and Probability of Recession

               Labor Markets Take a Step in the Right Direction, Odds of Recession Falling

  • The October Payroll Employment Survey showed a modest increase of 80,000 jobs for the month.
  • The separate Household Survey showed another sizeable gain, adding 277,000 jobs.
  • The Unemployment Rate ticked down to 9.0 percent, reflecting the strong gain in the household survey.
  • Average hourly earnings increased by 0.2 percent. The average workweek was unchanged at 34.3 hours.
  • The Probability of Recession for the U.S. before the end of 2012 has fallen to about 40 percent.

October payroll employment data showed a modest gain of 80,000 jobs for the month. The U.S. unemployment rate ticked down to 9.0 percent.  Those two numbers, by themselves, are not particularly impressive. However, we can see some more encouraging signs deeper in the report. First, we see a significant upward revision to the September payroll survey, previously showing a gain of 103,000 jobs, now revised up to a gain of 158,000 jobs. The separate household survey of employment is also running well ahead of the payroll survey. The household survey added a substantial 277,000 jobs in October. Over the last three months, the household survey has averaged a gain of 335,333 jobs per month, which looks very good. We could be seeing a structural disconnect between the two surveys that is beyond statistical noise. The household survey may be picking up growth in self-employment and job growth in small companies that the payroll survey is missing. So, if we take the upward revision to the payroll survey, the strong household survey and the dip in initial jobless claims (released yesterday) and weigh them against an only-modest gain to the payroll survey in October, it does looks like labor market conditions are starting to improve.

The U.S economy remains vulnerable to recession through the end of 2012 and into 2013. Labor market conditions, though modestly improving, are still weak. The housing sector has not yet pulled out of recession. Real disposable income has not grown over the past year. Government spending will continue to be a drag, particularly if automatic cuts to discretionary federal spending are allowed to start in 2013. Europe still looks like a black hole, threatening to drag down global growth. However, some things have improved over the past two months. We are starting to see modest improvement to labor market conditions. Third quarter real GDOP growth registered an acceptable 2.5 percent. Inventory accumulation will likely add to growth in the current fourth quarter. The U.S. stock market had a significant rally through October. Auto sales have climbed to a 13.2 million unit annual rate.  The preponderance of evidence suggests the likelihood that the U.S. economy will fall into recession before the end of 2012 is now lower. We were right at the tipping point through September. We now take a step back from the edge, to 40 percent. This is still elevated. We are not out of the woods yet.

Market Reaction: U.S. equities opened with losses. Treasury yields are down at both ends of the yield curve. Oil is down to $94.05/barrel. The dollar is up against the yen and the euro.

Employment

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