Wage Growth Highest in 7 Years

Job gains for October totaled 161,000 and the unemployment rate held at 4.9 percent in the October 2016 Employment Summary from the Bureau of Labor Statistics released on Friday.

The big news in the report, however, was in wage growth—average hourly earnings for October totaled $25.92, which was a 10-cent leap from the previous month. This came after an 8-cent hike in September, totaling an 18-cent rise over the last two months. Many analysts have cited wage growth not keeping up with home price appreciation as a major barrier to homeownership. Over-the-year, the average hourly wage increased by 2.8 percent in October.

Given the Fed’s wait-and-see approach to monetary policy—the central bank voted not to raise short-term rates in its meeting on November 2—and the perception that the October employment summary contains mostly positive news, some analysts believe that the October jobs report is likely to prompt the Fed to raise rates for the first time since last December’s historic rate hike.

“This was a solid jobs report, with steady employment growth and stronger wage growth,” said Curt Long, Chief Economist with the National Association of Federal Credit Unions. “While October’s job gains fell slightly below expectations, large upward revisions to prior months more than made up for it. Wage growth ticked up to 2.8 percent versus a year ago, which is the highest rate since 2009. From the Fed’s perspective, this report supports a rate hike in December.”

“The number of jobs created last month didn’t quite meet expectations, but combined with data from August and September that was revised strongly upward, there’s a good amount to be encouraged by in today’s report,” Zillow Chief Economist Svenja Gudell said. “Most notably for the housing market, residential construction employment registered one of the strongest months of job gains in the past decade and now stands at its highest level since November 2008, welcome news for a housing market struggling to add enough new inventory to keep up with strong housing demand. Additionally, wages continued to grow, and are up 2.8 percent from a year ago. This is especially important, as the nation’s most expensive housing markets are home to a growing share of the nation’s jobs. In order for housing to remain affordable in these areas, wages need to grow alongside housing costs.”

The most commonly reported employment rate, the U-3 rate, held steady from September to October at 4.9 percent, while the U-6 unemployment rate—which includes marginally attached workers and those working part-time for economic reasons—was 9.5 percent in October, its lowest rate since May 2008.

Fannie Mae Chief Economist Doug Duncan stated, “We believe that today’s firm jobs report seals the deal for a rate increase in December. The ammunition for a rate hike includes a solid job gain in October, meaningful upward revisions for the prior two months, and the biggest annual wage gain since June 2009. The decline in the labor force participation rate is arguably a slight blemish. However, the drop in the broadest measure of labor underutilization—the U6—to more than an eight-year low should overcome any concern that significant labor market slack remains. As always, a few things can throw a monkey wrench into the Fed’s plan, but the bar for inaction this year is now extremely high.”

Not everyone was convinced that October’s jobs report will convince the Fed to raise rates in December (one more jobs report will come out before the next Federal Open Market Committee meeting, which takes place on December 13 and 14.

“Employment gains remain modest—not too hot, not too cold,” said Lindsey Piegza, Chief Economist with Stifel Fixed Income. “For the Fed, a gain of 161k is hardly a green light for a December rate hike, nor does it, however, pull the plug on a plan to further remove accommodation just five weeks from now with a second-round hike of 25 bps. In other words, this morning’s report simply leaves Committee members—and market participants alike—questioning the true direction and health of the U.S. labor market. According to this week’s November FOMC statement, the Fed is looking for just “some” further improvement. This morning’s employment report, however, arguably fails to meet even this new, lowered threshold of progress. After all, more of the same is hardly positive headway.”

Click here to view the complete employment situation for October 2016.