The Unemployment To Drop 4.1%

The payroll report for October 2017 was still affected by the summer storms in Texas and Florida. That was expected. The Establishment Survey estimates for August and September were revised higher, the latter from a -33k to +18k. Most economists were expecting a huge gain in October to snapback from that hurricane number, but the latest headline was just +261k. For those two months combined, the headline advanced at an average +140k rate, or below the 6-month average.

Total hours worked, which rebounded last year, seems to have stalled this year at a much lower growth rate. That is consistent with the headline numbers where the labor market slowdown hasn’t really abated.

Without much economic momentum overall the labor force has flattened off again. It shrank by 765k last month, greater than the 575k increase recorded the month prior. At 160.4 million, the labor force in October was up just 324k since February.

Slowing labor participation is the reason the unemployment rate keeps falling to ridiculously low levels. Even though total employment fell back by 484k for the Household Survey in October, the much larger decline in the labor force left the unemployment to drop to just 4.1%, the lowest since December 2000.

At 4.1%, the unemployment rate has fallen far below the FOMC’s estimated central tendency for full employment. The range for the central tendency is the point at which the central bank expects slack to have been fully absorbed and therefore wages to rise sharply leading to accelerating consumer price increases. This is why Fed officials declare their expectation for wage-driven inflation at every possible moment.

With the actual unemployment rate now significantly underneath their lower bound, there is absolutely no reason for wage inflation to be anything but transitorily delayed – unless the unemployment rate is describing an economy that doesn’t really exist. Wage and earnings growth continues to be unusually depressed (NOTE: I use earnings because that’s what workers see and what employers really pay; if wage rates alone rise for non-economic reasons and there exists significant slack employers can modify the number of hours to offset wages which they can’t do if slack wasn’t present).