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Unemployment Dropped in October to the Lowest Level in Six Years.

Unemployment dropped in October to the lowest level in six years as 214,000 non-farm payrolls were added, the ninth consecutive month of 200,000 plus increases, the longest streak since the one ended in March 1995.

The data was disappointing in the aspect that consensus expected a 235,000 increase in non-farm payrolls, the unemployment rate did decline to a six year low of 5.8% as 638,000 jobs were created in the Household survey.  This gain outpaced the 416,000 increase in the size of the labor force.

This 5.8% rate is now getting very close to the Fed’s estimate of the long run equilibrium rate of between 5.2% and 5.5%.  However the question at hand is the labor participation rate (LPR).

The LPR did rise to 62.8% from September’s 62.7% level; the LPR is still bouncing along the bottom and is still considerably below the 66% level measured at the onset of the recession in December 2007.  The LPR stood at 64.6% in June 2009, the month the recession ended.

Last week I commented about the strength in hours worked and the lack of wage pressures.  Commenting about wage pressures, there is still no sign of a pickup in the all employees measure of average hourly earnings, the more inclusive employment cost index which takes benefits into account shows a clear acceleration in wage growth in both the second and third quarters.

Regarding hours worked, the data met expectations and September’s data was revised slightly lower.

Did this data alter monetary policy expectations?  Analysts are now expecting a 220,000 monthly increase in non-farm payrolls for the 2014, the greatest increase since 1999 with momentum heading into 2015.

Chicago Fed President Evans commented Friday “labor market slack is definitely diminishing with clear momentum” but warned about the dangers of raising interest rates too quickly.

Currently consensus thinks the first increase will be late summer but there is a growing minority that a change could occur by winter’s end.

Equity markets were little changed on the data but treasuries rallied.

Commenting briefly about oil, crude rallied Friday but is down for the seventh consecutive week, the longest streak since 2001. Did crude advance because Russian tanks rolled into the Ukraine and early cold weather?

This is quiet week for economic releases.  Perhaps a question at hand is the drop in gasoline prices fueling increased retail sales?  The data is released Friday.

Last night the foreign markets were up.  London was up 0.43%, Paris up 0.39% and Frankfurt up 0.31%.  Japan was down 0.59%and Hang Sang up 0.83%.

The Dow should open little changed.  The 10-year up 2/32 to yield 2.29%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.