U.S. Economy Adds 214K Jobs, Unemployment Rate Falls

The U.S. economy added 214,000 jobs in October, lower than the 231,000 jobs economists expected but still enough to maintain labor market momentum as the Federal Reserve ponders a timetable for raising interest rates.

While the number of jobs created came in under expectations, the headline unemployment rate dropped to 5.8%, the lowest level since July 2008, and under the 5.9% rate in September, according to numbers released today by the U.S. Department of Labor.

The report doesn't slow the momentum that started earlier this year and picked up in September when 256,000 jobs were created, far more than expected.

The 214,000 jobs gained in October represented the ninth consecutive month that the economy has created more than 200,000 jobs, a sharp rebound from the years of weak growth that followed the 2008 financial crisis and deep recession that followed.

Both the unemployment rate and the number of unemployed persons (9 million) fell in October. Since the beginning of the year, the unemployment rate and the number of unemployed persons have declined by 0.8 percentage point and 1.2 million, respectively.

And the labor force participation rate -- a key gauge of the share of Americans currently employed -- rose to 59.2% in October, the highest since July 2009, from 59% the prior month. Although it's still at its lowest level in decades.

Still, analysts are looking beyond the number of jobs created and the headline unemployment rate for signs that so-called slack in the labor market is tightening. In particular, economists – especially those at the Federal Reserve – are looking for growth in hourly wages.

"Although the headline number is decent, the details behind the curtain will be particularly concerning to investors and Main Street," said Todd Schoenberger, Managing Partner of LandColt Capital LP, in New York  "Wage growth is embarrassingly low, especially considering where we are in terms of the so-called economic recovery.  And the variety of jobs continues to be a joke.  Two-thirds of jobs created in 2014 pay just above minimum wage, whereas less than 50% of jobs created in 2013 were of the low-income variety.  Today's weak report validates Tuesday's election outcome as voters remain angry at their economic outlook."

Workers’ hourly earnings have been stagnant for months and the result has been an inflation rate that’s running well below the Fed’s 2% target rate.

In October, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.57, the Labor Department reported. Over the past year, average hourly earnings have risen by 2%, well below the 3%-3.5% rate the Fed views as necessary to keep inflation at its desired 2% target rate.

“U.S. unemployment fell to a six-year low of 5.8% in October as companies continued to take on staff in impressive numbers. The data add to signs that the economy is enjoying another period of strong growth in the fourth quarter. However, lackluster wage growth takes some of the shine off the improvement in the employment situation, and also acts as a bar to raising interest rates," said Chris Williamson, analyst at research firm Markit.

Employment rose last month in food services and drinking establishments, retail trade, and health care, according to the Labor Department figures.

Some analysts believe the recent strong job gains and falling unemployment rate will lead to higher wages.

“Hourly wages for production and non-supervisory workers were unchanged in September, but, given a falling unemployment rate, could well begin to rise more quickly in the months ahead,” David Kelly, chief global strategist at J.P. Morgan funds, said ahead of the release of Friday’s jobs report.

Wage growth will be a key indicator to watch over the next few months as the Fed determines when and how to raise interest rates and otherwise wind down the massive stimulus policies initiated in the wake of the financial crisis.

Fed Chair Janet Yellen has frequently highlighted wage growth as an indicator the Fed is watching for signs that labor markets are strengthening beyond the declining headline unemployment rate.

But the downside to rapid wage growth is inflationary pressure. When wages rise too quickly it can lead to runaway inflation and eventually cut into corporate profits.

Wage growth and other inflationary indicators are currently at the center of a growing debate within the Fed over the timing and trajectory of rate hikes. The consensus among Fed economists is that hikes should and will occur in mid-2015, soon enough to head off runaway inflation while remaining low long enough to continue providing stimulus to the fragile economic recovery.

When rates do move higher it will raise borrowing costs, making it more expensive for consumers to get a mortgage or a car loan, or for small businesses to get a loan for expansion.

Some economists believe there will be a six-month window -- likely the first half of 2015 -- during which higher wages will be welcomed as a contribution to the economic recover. After that, economists will start to worry about whether higher wages are fueling an overheated economy and driving up inflation.