Robust Employment Report Bolsters December Rate Hike Case

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October Jobs Up 271,000

By Lucia Mutikani

WASHINGTON -- U.S. job growth surged in October and the unemployment rate hit a 7½-year low of 5 percent in a show of economic strength that makes it much more likely the Federal Reserve will raise interest rates in December.

Nonfarm payrolls increased 271,000 last month, the largest rise since December 2014, the Labor Department said Friday. In addition, average hourly earnings rose a respectable 9 cents. The payrolls jump followed modest gains in August and September.

The unemployment rate now stands at its lowest level since April 2008 and is in a range many Fed officials see as consistent with full employment.

%VIRTUAL-pullquote-The employment report had everything you could have asked for.%"The employment report had everything you could have asked for. It more than offsets the weakness in the prior two months and positions the Fed to hike rates in December," said Michelle Meyer, deputy U.S. chief economist at Bank of America Merrill Lynch in New York.

The reaction in financial markets was swift and sharp.

The dollar rallied to a near seven-month high against a basket of currencies as investors braced for higher borrowing costs. U.S. Treasury debt prices fell, with yields on the two-year note hitting a 5½-year high. U.S. stocks ended mostly higher.

Rates futures implied a 70 percent chance of a Fed rate increase next month, up from 58 percent late on Thursday.

With speeches from several Fed officials, including Chair Janet Yellen, suggesting a low bar for a December rate increase, economists had said ahead of the report that monthly job gains above 150,000 in October and November would be sufficient grounds for the first increase in overnight borrowing costs since 2006.

The U.S. central bank, which has held rates near zero for nearly seven years, has made clear, both in its statement after its October policy meeting and Yellen's subsequent comments, that a rate hike is firmly on the table at the Dec. 15-16 meeting.

"We've indicated that conditions look like they could be right for an increase," Chicago Federal Reserve Bank President Charles Evans, who has argued against a rate hike, said in an interview Friday with CNBC. "The real side of the economy is looking a lot better."

A Reuters survey of banks that deal directly with the Fed showed 15 of the 17 so-called primary dealers expect monetary policy tightening next month. That compared with only 12 dealers in September.

Broad-Based Gains

Economists had forecast nonfarm payrolls increasing 180,000 last month and the unemployment rate remaining at 5.1 percent.

The report added to strong services sector and automobile sales data in painting an upbeat picture of the economy at the start of the fourth quarter. It bolstered views that growth will regain momentum this quarter after braking sharply to a 1.5 percent annual pace in the July-September period.

In addition to the unexpectedly stronger job gains last month, data for August and September were revised to show 12,000 more jobs created than previously reported.

Last month's rise in wages, which have been almost stagnant despite a tightening labor market, lifted the year-on-year reading to 2.5 percent. That was the biggest increase since July 2009 and could give the Fed confidence that inflation will gradually move towards its 2 percent target.

Combining hours, payroll gains and wages, a measure of take-home pay increased 0.6 percent in October, and was up 4.6 percent over the past 12 months.

"The economy has regained momentum just in time for the holiday shopping season," said Bob Hughes, senior research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts.

There were improvements in other labor market measures that Fed officials are eyeing as they contemplate a rate hike.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment fell two-tenths of a percentage point to 9.8 percent, the lowest level since May 2008.

The employment-population ratio rose to 59.3 percent from 59.2 percent in September. But the labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, held at a near 38-year low of 62.4 percent.

Employment gains in October were broad-based, though manufacturing added no jobs and mining shed 4,000 positions as oil and gas extraction payrolls fell 2,700.

Manufacturing has been hurt by a strong dollar, efforts by businesses to reduce bloated inventory and spending cuts by energy companies cutting back on well drilling and exploration in response to lower oil prices.

The mining sector has shed 109,000 jobs since peaking in December 2014. Oilfield services provider Schlumberger (SLM) last month announced further layoffs in addition to the 20,000 jobs it has already eliminated.

Construction payrolls, however, increased 31,000 last month, the biggest gain since February.

The services sector added 241,000 jobs in October, with large gains in retail, health and leisure. Professional and business services added 78,000 jobs, the largest gain since last November. Temporary help, a harbinger of future hiring, increased by 24,500 jobs, the biggest rise in nearly a year.

Government payrolls increased 3,000 last month.

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9 Numbers That'll Tell You How the Economy's Really Doing
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Robust Employment Report Bolsters December Rate Hike Case
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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