By Paul Gomme and Peter Rupert
The BLS announced that payroll employment increased by 150,000 according to the establishment survey. As we have argued about inflation, the one month change can be quite volatile. Looking at the three month average change, the picture shows a slowing trend for employment growth. The private sector added only 99,000, meaning the the government sector was responsible for about 1/3 of the overall gain. The payroll numbers for the previous 2 months were revised down 101,000; down 62,000 in August and 39,000 in September.
Private sector average weekly hours fell from 34.4 to 34.3. That, along with the jobs number drove total hours of work down by 2.6%, that largest decline in over a year.
Private sector average hourly earnings rose from $33.93 to $34.00, a 0.2% increase. Real wages continue to rise as the year over year wage increase is outpacing CPI inflation.
The household survey data paints a slightly darker picture. Employment fell 348,000 and the employment to population ratio fell from 60.4 to 60.2. The labor force declined 201,000. The number of people unemployed rose by 146,000. Those changes combined to increase the unemployment rate from 3.79% to 3.88%. The unemployment rate for men has increased faster than that for women since the beginning of 2023.
CPI
On an annualized basis, monthly CPI inflation plunged from 4.9% in September to 0.5% in October. As we have previously noted, monthly inflation is extremely volatile. One way to smooth out these fluctuations is to look at the annual inflation rate which fell from 3.7% (September) to 3.2% (October). However, the 12-month inflation rate sluggishly reflects changes in underlying inflation which is why we prefer to look at the three-month inflation rate. The good news is that this measure also dropped, from 4.9% to 4.4%.
Others prefer to look at core CPI inflation (removing the volatile food and energy components). The annualized monthly change in core CPI inflation is down, from 3.9% to 2.8%; the annual core CPI inflation rate dropped marginally, from 4.1% to 4.0%. However, the three-month annualized core CPI inflation rate rose, from 3.1% to 3.4%.
Remember that we at econsnapshot prefer the annualized three-month inflation rate over both the monthly inflation rate (too noisy) and the annual (12-month) inflation rate (too smooth and sluggish). Those who look to core inflation measures presumably think that it’s a better measure of trend inflation. But, what exactly is trend inflation? A minimal requirement is that over longer horizons, it tracks actual inflation, sort of like drawing a line through the monthly inflation numbers. One issue with core CPI inflation is that it often persistently deviates from overall CPI inflation.
Policy Outlook
The employment report did little to suggest either an increase or decrease in the Fed funds rate at the next meeting. Employment growth shows a slight decreasing trend over the last year or so. For the most part, CPI inflation for October was down relative to September; however, it is still well above the Fed’s stated 2% target. Keep in mind that the Fed’s target applies to core PCE inflation, not CPI inflation. At the end of the month, the BEA will release the October PCE price index data. However, there’s useful information to be gleaned from the CPI numbers. Since 1990, headline CPI inflation and core PCE inflation have outstripped core PCE inflation by roughly half a percentage point. This suggests that CPI inflation of around 2.5% is consistent with core PCE inflation of 2%. That CPI inflation is down in October suggests that PCE inflation will also be down. Given the current levels for CPI inflation, it seems doubtful PCE inflation will be close to the Fed’s target. The case for further tightening of monetary policy is that inflation remains stubbornly above target. The case against lies in Milton Friedman’s observation that the effects of monetary policy operate with long and variable lags — suggesting that the Fed should wait to see whether they have already built in sufficient tightening. Only time will tell whether Jerome Powell will manage the elusive soft landing.