Unemployment Rate Likely to Edge Lower in October Jobs Report

The Week Ahead

The unemployment rate is forecast to edge lower in the October jobs report, with modest payrolls growth and a stagnant or contracting labor supply. Average hourly earnings’ growth is expected to hold in low gear and lag the CPI again, but its softness is not a sign of labor market weakness. Last week’s release of the Employment Cost Index showed that health benefit inflation is accelerating, crowding out pay increases in employers’ compensation budgets.

The CPI’s increase will slow in October on a partial reversal of September’s spike in gasoline. The Bureau of Labor Statistics won’t publish a year-over-year value for the October CPI since last October’s government shutdown prevented the month’s survey. If they did, the CPI would likely be up about 3.75% year over year this October, and core CPI about 2.75%.

Last Week in Review

The Federal Reserve held the federal funds target rate steady as expected in October after raising it a quarter percentage point at the prior decision. Chair Warsh’s key quote from the post-meeting press conference was that tighter financial conditions since the September rate hike “go in the direction of achieving a longer, more durable period of economic growth and price stability.” This statement has three implications: First, the Fed sees a case for further hikes, since “go in the direction” implies they’re not there yet. Second, the Fed aims to raise rates modestly as part of a mid-cycle adjustment, not to make them so tight that they threaten a serious slowdown. And third, the Fed is still in the business of forward guidance, even if Chair Warsh wishes he could give up the practice.

PCE inflation matched expectations in September, with the total PCE price index up 0.5% on the month and 3.6% on the year, while the core PCE price index less food and energy rose 0.3% on the month and 3.1% on the year. Gasoline and other energy goods jumped 9.2%, and transportation services (including airfares) rose 2.1%, the month’s biggest drivers of inflation. Nominal personal consumption expenditures rose 0.5%, all due to higher prices (Real spending was unchanged). Personal income rose 0.2%, lagging prices. Real disposable personal income fell 0.3%.

With spending up more than income, the personal saving rate fell to 3.8% from 4.0% and was the lowest since October 2022. The saving rate’s decline is a measure of stress on low- and middle-income household budgets, helping explain recent sour consumer surveys.

In a separate release, real GDP growth picked up to 3.4% annualized in the third quarter from 2.2% in the second quarter. Personal consumption expenditure growth held steady at a solid 3.8%, and nonresidential fixed investment surged 12.7% annualized. The trade deficit widened to 3.8% of GDP as imports surged 19.7% annualized and exports fell 5.7%. The Fed will see the widening trade deficit amid accelerating growth as a sign that demand is growing faster than the economy’s potential growth rate, another pebble on the Fed’s scales in favor of additional rate hikes.