October employment: Searching for the signal in the noise

Summary

We expected a noisy October employment report due to Hurricanes Helene and Milton as well as some strike activity, and the event delivered on those expectations. Nonfarm payrolls rose by just 12K in October, the weakest reading for payroll growth since December 2020. It is clear that the hurricanes and strikes reduced employment growth below what it otherwise would have been. That said, when doing our best to look through the noise, there were some signs of softening in the labor market. The industry composition of employment growth in October hinted at some weakness beyond the one-off factors that drove the poor headline reading. Job growth in August and September was revised down by a cumulative 112K, suggesting that last month's stellar employment report was not as strong as previously believed. The unemployment rate should have been less impacted by the hurricanes and strikes, and on an unrounded basis it rose by one-tenth of a percentage point.

On balance, the unusually weak employment report in October should be taken with a healthy dose of skepticism. The special factors at play likely will keep the FOMC from repeating its September 50 bps rate cut at its meeting next week. That said, the continued softening in employment conditions was consistent with the other labor market data released this week. A decline in job openings and slowdown in employment cost growth are additional signals that inflationary pressures are no longer emanating from the labor market. A 25 bps rate cut at next week's FOMC meeting seems highly likely in our view.

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