The Fed needs to see one thing in Friday's big jobs report: 'further improvement'

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Why the October Jobs Report Is So Important to the Fed

On Friday morning, the Bureau of Labor Statistics will release the employment report for October.

Among other things, this report will be the first step towards reading how comfortable the Federal Reserve might be with actually raising rates at it's December meeting.

Via Bloomberg, here's what Wall Street is expecting:

  • Non-farm payrolls: +182,000
  • Unemployment rate: 5%
  • Average hourly earnings month-on-month: 0.2%
  • Average hourly earnings year-on-year: 2.3%
  • Average weekly hours worked: 34.5
  • Change in manufacturing payrolls: -4,000

The most important thing

The Fed needs to be confident that, as it has said repeatedly, there is "further improvement" in the labor market and that the slowdown in jobs growth during the summer wasn't indicative of a new, negative trend for the US economy.

On Wednesday, Fed chair Janet Yellen reminded markets that a December rate hike was "a live possibility" as she testified before the House Financial Services Committee. This comment is part of why Friday's report, the first of two before the Fed's December meeting, is quite important.

In a sense, markets are back where they were just before Fed's September meeting when every data point appeared almost like a road block that had to be cleared. The difference is that during this run-up to the December meeting, the Fed has been more aggressive about prepping markets for a hike should the data line up.

A first hike in nine years would show that the Fed is ending its emergency measures that aimed to support the economy after the recession.

In last month's jobs report, not only did the economy add 142,000 jobs in September — less than expected — but the print for August was revised down to 136,000, the second-weakest for 2015.

What baffled some economists was that initial jobless claims kept falling during the same period. The four-week average dropped to the lowest level since 1973 two weeks ago.

"It is not just the initial claims series that has made us doubt the magnitude of the slowing in payrolls," High Frequency Economics' Jim O' Sullivan wrote in a note to clients.

Cameron O'Sullivan noted that the employment indexes in the ISM manufacturing and non-manufacturing indexes in September were consistent with payroll gains of over 200,000.

But in October, the employment component of the manufacturing ISM fell, while the non-manufacturing sub-index rose.

Deutsche Bank's Joe LaVorgna noted on Tuesday that the impact on jobs growth was mixed in previous periods of divergence.

Overall, "the weight of evidence points to no significant loss of momentum in the labor market," O'Sullivan wrote.

"That does not guarantee that payrolls will bounce back in this week's report, of course."

'Full employment'

Economists expect the unemployment rate to drop to 5% for the first time since April 2008.

That's a level most economists consider to be "full employment."

In a client note Thursday, Stifel chief economist Lindsey Piegza wrote that because the Fed's central tendency of unemployment is in a range of between 4.9% and 5.2%, the economy has already been at full employment since June.

Piegza mentioned that, of course, other measures like the labor participation rate still show that some resources still aren't being fully utilized, meaning there's still some slack. But the "full employment" hurdle is one the Fed is likely to want to clear before raising interest rates.

Wage growth

Economists expect year-on-year wage growth to tick up to 2.3% from 2.2%, which would still leave the pace relatively sluggish.

An increase may be partly because of a calendar quirk, according to Societe Generale's Brian Jones. The survey period ended on October 17, comparatively late, and that could boost the work span of employees, the average workweek, and average hourly earnings.

Besides that, wage pressures have been evident in the economy for a while now. In this earnings season, executives at The Cheesecake Factory and Panera Bread have been among those discussing rising labor costs.

Either way, it's good news for workers.

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See Also:

SEE ALSO: CITI: History suggests Friday's US jobs report could be a make-or-break event in terms of the near-term outlook for rates.

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