Job seekers at a community job fair in the United States. Photo: U.S. Army photo by Pfc. Deziree Keay (public domain, via Wikimedia Commons).
American employers added 165,000 jobs in October, more than double what economists had expected, and the unemployment rate slipped to 4.1 percent, the Labor Department reported on Friday — a show of strength that has traders betting the Federal Reserve will raise interest rates in December.
A Much Stronger Report Than Expected
The headline number smashed forecasts. Economists polled by Reuters had expected payrolls to rise by only 65,000, with estimates ranging from 35,000 to 125,000. September's gain was also revised up to 60,000 from 29,000, and the economy added 84,000 more jobs in August and September combined than previously reported.
The unemployment rate fell to 4.1 percent from 4.2 percent in September, with 7.1 million people out of work. The labor force grew by 421,000 people in October, and household employment — a separate, more volatile measure — rose by 463,000.
Hiring was broad. Professional and business services added 70,000 jobs, far above that sector's average monthly gain of 15,000 over the previous 12 months. Health care added 42,000 positions, led by hospitals, while transportation and warehousing rose by 25,000 and manufacturing by 19,000.
Average hourly earnings rose 3.1 percent from a year earlier — but that still trails the 3.7 percent rise in consumer prices recorded in September, so pay is not yet keeping up with the cost of living.
What It Means for the Fed
The report puts a December rate hike firmly back on the table. The Federal Reserve held its benchmark rate at 3.75 to 4.00 percent at its October 28 meeting, with two officials favoring an increase at the time. After Friday's data, traders raised the odds of a quarter-point hike at the Fed's December 8-9 meeting to about 80 percent, according to the CME FedWatch tool, up from roughly 67 to 70 percent beforehand.
New York Fed President John Williams said on Friday that US economic growth has remained remarkably resilient in the face of successive shocks, but that inflation is too high and it is essential to bring it back to 2 percent. St. Louis Fed President Alberto Musalem warned that the rapid build-out of artificial intelligence infrastructure could add to near-term inflation pressure. San Francisco Fed President Mary Daly told CNBC the report put a "definitive tick" in the case for a hike.
Reuters reported that the strong figures give the Fed more scope to focus on inflation stemming from the Middle East conflict, and keep it on track to raise rates in December. The report also suggests the labor market is strengthening after stumbling in mid-summer.
Markets React
The dollar surged after the release, with the dollar index jumping 0.77 percent to 102.26, its biggest daily gain in nearly five months. The 10-year Treasury yield climbed to around 4.85 percent and the two-year yield to 4.52 percent. Gold fell 0.3 percent to $4,074.36 an ounce, as the stronger dollar made it more expensive for overseas buyers.
The report landed a day after a brutal selloff. On Thursday, the S&P 500 wiped out about $3 trillion in market value and the Nasdaq suffered its biggest one-day percentage drop in 19 months, driven by post-midterm fears that tougher regulation of the AI buildout could slow economic growth.
What Comes Next
The next big test arrives on Tuesday, November 10, when the October consumer inflation report is released. Consensus expectations point to a 0.3 percent monthly rise in headline inflation, with annual inflation expected to hold near 3.7 percent. A hot reading would likely push December hike bets even higher. The November jobs report follows on December 4.
Sources: Reuters, Bureau of Labor Statistics, Bloomberg, CME FedWatch.