USC
Live coverage: UCLA vs. Stanford
BUSINESS

Strong jobs data set stage for rate hike

Hiring and wages surged last month as the unemployment rate dropped to 5%, a symbolic threshold with potential significance both for the economy and the 2016 election.

The latest jobless figure is the lowest since April 2008 and exactly half the rate from its peak in 2009 during the Great Recession. Moreover, the labor force expanded last month, unlike some previous months when the unemployment rate dropped because large numbers of people had stopped looking for work.

Signs of a strong U.S. labor market may prod the Federal Reserve next month to make its first rate hike in nearly a decade, analysts said.

The combination of solid job growth, lower unemployment and higher wages comes at a crucial time politically as the country moves toward an election year. If historical patterns hold, economic conditions in the next nine months will be among the strongest factors in determining which party wins next November's election.

So far — although the economy has expanded steadily since the official end of the Great Recession in June 2009 — polls continue to show widespread unease about the economy. That anxiety has held down the benefit that President Obama and his party might otherwise expected from improvements in jobs data.

If healthy employment gains continue — and perhaps more importantly, wage gains — that would give Democrats a significant boost.

That's no sure thing, economists cautioned.

Friday's “blowout” employment report is “not a trend we're expecting to continue,” said Michelle Meyer, an economist at Bank of America Merrill Lynch.

“But looking ahead,” she said, “there's still momentum in the labor market, which is encouraging.”

The last time the jobless figure was this low was in the spring of 2008. From that point, unemployment began rising rapidly until peaking in October 2009 — and along the way profoundly influencing the political and economic life of Americans.

Friday's unexpectedly strong report from the Bureau of Labor Statistics eased concerns, voiced by many economists earlier this fall, that the economy had begun to shift into a lower gear.

The report said that employers added a net 271,000 new jobs in October. While manufacturing and the mining industry were essentially flat — hurt by the strong dollar, weakness abroad and low oil prices — business and professional services, retail, healthcare, leisure and construction all bulked up their payrolls.

The job growth was far above the consensus forecast by analysts, who had predicted about new 185,000 jobs. It marked a sharp acceleration from August and September when employers had added 153,000 and 137,000 jobs, respectively, according to the latest updated figures.

In addition to the nation's jobless rate inching down to 5% from 5.1% in September, analysts were heartened by what has been a long elusive goal: a pickup in workers' pay.

In October, average hourly earnings rose a solid
9 cents from the previous month. That's a year-over-year gain of 2.5%, which is the highest since July 2009. Throughout the economic recovery, wage gains have been running just around 2%, and the latest uptick may signal that employers are finding the need to raise pay more to attract workers as unemployment drops.

The strong job growth, particularly in construction and professional services, bodes well for California, whose jobs report for October will be released in two weeks. Housing permits have been running strong in the state, and California is a leader when it comes to technical services such as engineering and computer systems design, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.

California's share of job growth this year has far exceeded its size in population, and the state's unemployment rate, historically higher than the country's, has fallen sharply, to 5.9% in September from 7% at the start of the year.

Economists are divided on whether the labor market is as tight as the jobless rate would indicate. The current unemployment rate is very close to a level at which economic theory predicts that wage and inflation pressures should begin to swell.

Thus far, however, most workers have gained little leverage in the marketplace. Relatively few are quitting jobs because they see better pay and opportunity elsewhere. The share of workers doing that has been flat in recent months and remains below pre-recession levels.

Meanwhile, the number of part-time workers who want full-time jobs remains relatively high, although it has dropped significantly, especially in the last two months.

There are also millions of prime-age workers who dropped out of the labor force in recent years, and many of them could come back to the job market if conditions continue to improve. If so, they would compete with other job hunters for new positions. For all of these reasons, some economists argue that the unemployment report is understating the weakness in the labor situation.

But other economists believe that many of those who dropped out of the labor market have done so because of early retirements that they don't plan to reverse.

“Workers who stepped out of the labor force are not coming back,” said Sophia Koropeckyj, an economist at Moody's Analytics.

In her analysis of Friday's jobs report, she noted that wage gains were pronounced in construction, business services and healthcare — industries that have struggled with worker shortages.

That debate may be crucial in how Federal Reserve officials manage interest-rate policies. Fed officials don't want to raise interest rates too early, thereby slowing the economy and potentially leaving large numbers of people unemployed. But they also don't want to wait too late and run the risk of inflation getting too high.

Fed Chair Janet L. Yellen said this week that the economy is “performing well” and that a rate hike could come next month. Friday's jobs report will bolster her confidence as well as that of her colleagues at the central bank.

Analysts now expect that the Fed will raise its benchmark interest rate at its next meeting, Dec. 15-16, and that could be a lock if the last monthly jobs report of the year in early December shows continued strength.

The Fed had held off raising rates this fall in part because of slowing global economic growth, particularly in China, and the potential impact on the U.S.

But those concerns have eased, and American consumers have stepped up their spending, thanks to steady job gains, low debts helped by rock-bottom interest rates and relatively resilient housing and stock markets. New cars have been flying off dealer lots. And economists are looking to consumers to keep fueling the economy, now in its seventh year of growth.

“We've had a major upward movement in consumer spending,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “Domestic demand is now offsetting turbulence from abroad that it didn't in the past.”

don.lee@latimes.com

Copyright © 2016, Los Angeles Times

UPDATE

5:36 p.m.: Updates with additional details and background

9:20 a.m.: The story has been updated with comments from analysts.

This post was originally published at 5:56 a.m.

 

82°