Hot October Jobs Report Raises Odds of December Rate Hike

Key Takeaways

• The US added 165,000 jobs in October, according to Friday’s nonfarm payrolls report, which also raised growth estimates for each of the two prior months.
• The unemployment rate edged down, while the labor force participation rate increased, which some economists say could be a precursor to faster wage growth.
• Traders on Friday upped their bets that the Fed will raise interest rates by a quarter point in December.

The trend of unpredictable labor market readings persisted on Friday, when the latest nonfarm payrolls report showed hiring was stronger than expected in each of the past three months, suggesting the past year’s stagnant labor market could be turning a corner.

The US economy added 165,000 jobs in October, more than double the 65,000 economists predicted, according to data from the Bureau of Labor Statistics. The report also revised up August and September growth by a cumulative 84,000 jobs. The unemployment rate ticked down to 4.1% from 4.2% in September.

The report firmed investor expectations that the Federal Reserve will raise interest rates by a quarter point in December. “The Fed will be more eager to hike rates in December after today’s jobs report,” says Preston Caldwell, senior US economist at Morningstar. He says October’s strong jobs growth suggests the labor market could be shifting into a higher gear. “It looked like the labor market was merely holding steady, but now job growth has accelerated to a rate meaningfully above our breakeven estimate, suggesting the labor market is actually tightening.”

Friday’s report was “well above anyone’s expectations,” says Adam Schickling, senior economist at Vanguard. “The cyclical environment had been sort of improving starting in the summer months, and I think this report and what we saw with [this week’s Job Openings and Labor Turnover Survey] is indicative of that.” The September JOLTS report, released Tuesday, showed an encouraging jump in job openings and quits.

October Jobs Report Key Stats

• Total nonfarm payrolls rose 165,000 after increasing by a revised 60,000 in September.
• The unemployment rate declined to 4.1% from 4.2% in September.
• Average hourly earnings rose 14 cents, or 0.4%, after increasing 0.1% in September.

October’s strong job growth was driven by surging professional and business services employment, which added 70,000 jobs last month after averaging 15,000 over the prior 12 months. Healthcare and manufacturing, two sectors that have seen steady job growth this year, added 42,000 and 19,000 jobs, respectively.

The unemployment rate came in at 4.1%-4.3%, where it has been since March. Below that historically low unemployment rate, details suggest some economic pressures are affecting workers. “Most of last month’s increase in employment in the household survey went into part-time work, raising the underemployment rate,” wrote Bill Adams, chief US economist for Fifth Third Commercial Bank. The number of employed people saying they were working part-time for economic reasons increased by 356,000, a 12% month-over-month increase.

Economists were split on what to make of last month’s larger-than-expected increase in wages. Accelerating wage growth can feed through to inflation by raising employers’ costs and increasing consumers’ spending power. Wages have been increasing more slowly than prices for the past several months, relieving the economy of some inflationary pressure. Jeff Schulze, head investment strategist at Franklin Templeton Institute, called October’s 0.4% increase “a reset rather than a revival.”

Others say wages deserve more attention. “A fall in unemployment amid rising participation rates tells me that the labor market is tight, so we should expect wages to rise as firms compete for workers,” writes Jeffrey Roach, chief economist for LPL Financial.

Morningstar’s Caldwell says wage growth remains below the threshold considered inflationary, “but that could change if job growth continues to run hot.”

To be sure, October’s surprisingly strong print follows a pattern of volatile jobs reports this year. The large month-to-month swings are “a consequence of mathematics,” says Vanguard’s Schickling. “Because your gross numbers are so low, it doesn’t take much of a change for the net figure to move substantially.”

Strong Jobs Report Increases Odds of a December Rate Hike

Economists say October’s strong jobs growth increases the likelihood that the Fed raises interest rates next month. With the labor market showing signs of stability, and maybe even strength, officials may feel more confident the economy can withstand higher rates.

Friday’s report “puts renewed pressure on the Fed to hike in December after post-midterm fears that a slower AI buildout cooled hike expectations,” wrote Schulze of Franklin Templeton.

The market-implied odds of a December hike dropped to 67% yesterday from 83% on Wednesday, as investors dumped tech stocks on worries that newly elected Democrats will halt or slow data center construction. After the release of the jobs report, those odds jumped back up to 79% on Friday.

Economists say that in the near term, the Fed’s attention is divided between the labor and stock markets. Schickling of Vanguard says the labor market likely remains in the background despite Friday’s report, but Thursday’s selloff may increase the central bank’s sensitivity to the stock market because “they may start to get a little concerned about the wealth effect channel if you see another 10% selloff in equities before December.”

High-income and wealthy consumers—the upper arm of the “K-shaped economy,” whose finances have been strengthened by a buoyant stock market—have driven consumer spending for the past several years. The AI data center boom has also boosted economic growth, making slower AI spending a double-pronged threat to the economy.