The Independent Market Observer

Monday Update: Job Growth Gets Back on Track in October

Posted by Sam Millette

This entry was posted on Nov 8, 2021 9:35:33 AM

and tagged In the News

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In his Monday Update, Commonwealth’s Sam Millette highlights business confidence, the Fed’s November meeting, October employment, inflation, and more. Last week’s important economic data releases were focused on business confidence, the Fed’s November meeting, and the October employment report. While most of the news was positive, the jobs report was the highlight, as the pace of hiring improved notably during the month of October. This week will be slightly quieter, with October’s inflation reports and a first look at consumer sentiment in November serving as highlights.

Last Week’s News

Monday saw the release of the ISM Manufacturing index for October. This widely followed measure of manufacturer confidence declined by less than expected, falling from 61.1 in September to 60.8 in October. The forecasts were for a decline to 60.5. This is a diffusion index, where values above 50 indicate expansion, so this result signals continued manufacturer growth despite the modest decline. Last year, manufacturer confidence increased notably following the expiration of initial lockdowns, and the index has stayed in expansionary territory since June 2020. Still, despite the healthy confidence levels, manufacturers have had to contend with rising headwinds throughout the year, most notably tangled global supply chains, labor shortages, and rising costs. Nonetheless, the continued strength of manufacturer confidence in October is an encouraging signal that producers view these obstacles as challenges that can be overcome.

On Wednesday, the ISM Services index for October was released. Service sector confidence increased by more than expected, as the index rose from 61.9 in September to 66.7 in October. The forecasts were for a more modest increase to 62. The October result brought the index to its highest recorded level since 1997. This is another diffusion index, where values above 50 indicate expansion, so this strong result indicates that service sector activity picked up notably during the month. Throughout the year, service sector businesses have been supported by an improving public health picture that allowed consumers to go out and spend freely. High levels of business confidence tend to support higher levels of business investment, so this encouraging report bodes well for business spending and hiring in October.

Wednesday also saw the release of the FOMC rate decision from the Fed’s scheduled November meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and there were no changes to interest rates at this meeting. The focus was on the Fed’s announcement it would begin tapering monthly asset purchases later this month. Throughout the pandemic, the Fed has been purchasing $120 billion a month in Treasury and mortgage-backed securities. Going forward, the tapering program will reduce these purchases by $15 billion a month, as long as the economic recovery continues. This action could lead to an end to the Fed’s quantitative easing program by next summer. Once the Fed completes winding down purchases next year, many economists believe the door will be opened for potential interest rate hikes in the second half of the year. Encouragingly, no signs of additional market turbulence surrounded the announcement. This indicates the Fed did a good job of setting market expectations for a taper.

On Thursday, the September international trade report was released. The trade deficit increased by more than expected, rising from a downwardly revised $72.8 billion in August to $80.9 billion in September. The forecasts were for an increase to $80.2 billion. This report marks the largest monthly trade deficit on record, breaking the record set in June 2021. Furthermore, the 11.2 percent increase in the deficit in September was the largest single-month increase since June 2020. The widening of the trade gap was due to a 0.6 percent increase in imports and a 3 percent decline in exports. The sharp drop in exports was largely due to a slowdown in oil and gold exports in September, which was partially caused by the impact of Hurricane Ida at the start of the month. The trade deficit has remained well above pre-pandemic levels throughout the current recovery, as high domestic demand and an uneven global recovery have served as a tailwind for imports and a headwind for exports.

We finished the week with Friday’s release of the October employment report. During the month, 531,000 jobs were added, in a result above estimates for an additional 450,000 jobs. In addition, September’s results were revised up from an initial report of 194,000 jobs to 312,000 jobs added for the month. The October result was very encouraging, given that the recent slowdown in job creation was a potential sign of a slowing recovery. Although the high number of job openings indicates a labor shortage, the accelerated hiring during the month is a positive sign that businesses are finding ways to get people back to work. The underlying data was encouraging as well. The unemployment rate fell from 4.8 percent to 4.6 percent, against forecasts for a decline to 4.7 percent. The labor force participation rate remained unchanged during the month. But the participation rate for prime-age workers between the ages of 25 to 54 increased, in a sign that folks are continuing to reenter the labor force.

What to Look Forward To

On Tuesday, the October Producer Price Index is set to be released. Producer prices are expected to increase by 0.6 percent during the month, in a modest step up from the 0.5 percent increase in September. On a year-over-year basis, producer inflation should remain unchanged at 8.6 percent. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.5 percent during the month and 6.8 percent year-over-year. This year, producer prices have seen upward pressure due to tangled global supply chains and rising material costs. Labor shortages have also played a part in driving up prices. The pace of monthly price increases has declined this year, but producers must contend with high inflationary pressure compared with pre-pandemic levels.

Wednesday will see the release of the October Consumer Price Index. Consumer prices are expected to increase by 0.6 percent during the month, up from the 0.4 percent rise in September. On a year-over-year basis, consumer prices are expected to show 5.8 percent growth, up from a 5.4 percent gain in September. Core consumer prices, which strip out volatile food and energy prices, are expected to show a 0.4 percent and 4.3 percent increase on a monthly and year-over-year basis, respectively. As with producer prices, consumer prices have seen upward pressure this year due to supply chain constraints and high demand. The anticipated increase in headline and core consumer prices is due in part to declining medical risks, which allowed consumers to go out and spend freely. The Fed continues to view much of the rising inflationary pressure as a consequence of the reopening and economic recovery efforts this year. Notably, the recent tapering announcement is the first step in tightening monetary policy.

Finally, on Friday, the preliminary estimate for the University of Michigan consumer sentiment survey will be released. Economists expect to see consumer sentiment improve during the month. Estimates call for a modest increase from 71.7 at the end of October to 72.3 to start November. If estimates hold, the result would represent a partial rebound for the index, which was at 72.8 in September before falling in October. Over the past few months, confidence has been muted, largely due to rising concerns about inflation and the Delta variant. But, with medical risks declining over the past two months, we may see a larger increase in sentiment than expected. Such a result would echo the improvements recorded in the Conference Board Consumer Confidence Index at the end of October. Historically, improving consumer sentiment has supported consumer spending growth. Accordingly, any improvement for the index in November would be welcome, even if the way back to pre-pandemic levels is long.

That’s it for this week—thanks for reading!

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