November 1, 2006
RECONSIDERING EMPLOYMENT GROWTH (AGAIN)
No one will be impressed by this morning's report on October employment from ADP/Macroeconomic Advisers. In the history of job creation, October's pace is middling at best. But the good news is that in the current world of reduced expectations, no one will be overly discouraged by the latest ADP number either.
Total nonfarm private employment rose by 128,000 last month, the largest advance since June's 368,000 surge, the ADP National Employment Report advised. In percentage terms, October's rise measured 0.1%, a pace that's been consistent for each and every month since July. "These findings suggest a modest re-acceleration of employment in October, following three months during which...gains in private nonfarm employment averaged a slower 95,000 per month," the release opined.
October's rise came close to matching the prediction from David Resler, chief economist at Nomura Securities in New York. In a note to clients today, Resler wrote that the "somewhat bigger increase in October looks to be consistent with other broad economic indicators showing that economic activity is likely to accelerate toward 3% real GDP growth in the fourth quarter after the anemic 1.6% growth in Q3."
Meanwhile, the government's employment report for October is scheduled for release on Friday. But if recent history's a guide, no surprises are likely in terms of a large deviation in the trend relative to ADP's numbers. According to Resler, ADP's jobs tally since July has been "reasonably consistent" with the numbers from the Bureau of Labor Statistics. If anything, ADP's count has tended to be slightly under BLS's measure, as the chart below shows. Resler reported that ADP's average monthly gain in non-farm private sector payrolls averaged 95,000 per month during July through September vs. 108,000 a month in private sector job increases per the government.
In other words, the real issue is debating if the reacceleration has legs. If so, is it time to raise interest rates again? Core inflation has been inching higher, and if the trend is joined by a renewed rise in job creation, the Fed may be forced to act with a fresh round of tightening.
But for the moment, there's no sign of worry in Fed funds futures trading. The December contract remains priced in anticipation of 5.25%, which is the current target rate. Of course, a lot can happen between now and December 12, the date of the FOMC's next scheduled confab.
Meanwhile, adding to the notion that there's no monetary tightening on the horizon for the moment comes by way of the latest money supply figures. Looking at a 10-week moving average of M2 money supply shows the highest pace of increase in the first half of October (the latest numbers available) since May 2004.
It's easy to be on the fence these days about what comes next. And that means the odds are rising for higher volatility in the capital markets. Perceptions, in short, are easily adjusted when investors are on pins and needles about the next economic release.
Yes, Halloween is over, but there are still plenty of ghosts and goblins lurking in data's shadows.
Posted by jp at November 1, 2006 10:07 AM
I have read recently that many experts have problems with the way the unemployment numbers are tabulated and that true unemployment is closer to 10%. For example, if someone is unemployed but is no longer actively looking for work, they are not counted as unemployed, if I recall correctly.
Posted by: David Hopkins at November 2, 2006 9:31 AM