Sustainable Job Growth Looks Increasingly Plausible

The economy added 126,000 jobs in October and a revised 125,000 in September.
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Updated from 8:54 a.m. EST

A growing chorus of economists sees Friday's stellar employment report as evidence a durable recovery is coming to the economy's last major straggler: the labor market.

The U.S. added 126,000 nonfarm jobs in October, and the government said far more jobs were added in September and August than previously reported. The headline unemployment rate fell to 6%, with the services sector accounting for nearly all of the improvement. The Labor Department revised the September data from a rise of 57,000 to a rise of 125,000, and said 35,000 jobs were added in August, not the decline previously reported.

"This unexpected jump in payrolls coupled by the drop in unemployment suggest that the economic recovery is now self sustaining," said John Lonski, senior economist at Moody's. He believes that the U.S economy will no longer require further assistance from either the

Federal Reserve

or the government in the near future.

The report is "finally a bit of print data that we all needed to feel better that the economic recovery is sustainable," according to Jeff Kleintop, chief investment strategist at PNC Financial Services Group. He noted that many big companies such as

IBM

(IBM) - Get Report

,

UPS

(UPS) - Get Report

and

Bank of America

(BAC) - Get Report

have lately said they will increase hiring.

The Labor Department said service-oriented industries added 143,000 jobs to their payrolls in October and 138,000 in September. About 43,000 of the October increase occurred in the staffing segment. In another bullish development, the average workweek rose to 33.8 hours in October from 33.7 in September, often an indication more hiring is in the offing.

A consensus of economists had forecast an increase of 55,000 in October and for the unemployment rate to have held at 6.1%. On Thursday, the government said the number of workers filing for first-time unemployment benefits last week fell to 348,000, the lowest level since January 2001.

Still, Kleintop believes there are three key areas that need continually better data to really seal the deal for the economy: more job growth, an inventory buildup and capital spending. Those, he said, might not pick up until next year.

"Capex is falling below the level of depreciation," said Kleintop. "We're not making new outlays." Although structural spending is picking up, especially in the tech sector, "it's going to take a strong pace to pick up relative to depreciation."

On another note, the big employment gain helps raises the odds of a

Federal Reserve

interest rate tightening. In a speech Thursday, Fed Chairman Alan Greenspan said the labor market "remains weak" relative to its recent peak, but "the odds, however, do increasingly favor a revival in job creation." Rate hikes this week in Australia and particularly England, which cited strength in consumer spending and housing sales, also raised jitters in the U.S.

The 10-year Treasury note was recently down 15/32 to yield 4.47%, its highest rate in two months. The note had been down about 4 ticks before the employment numbers hit at 8:30 a.m. EST. All three stock indices were recently up on the strong jobs report.

"This report compels a prudent investor to be prepared for a 25 basis point hiking of the fed funds rate by March 2004," Lonski said, but he noted that a fed funds rate of 1.25% will not be burden to the economy.

"If we could raise payrolls 150,000, including November through January, and if the holiday shopping season fulfills expectations, then we have every reason to expect that the Fed will more closely align the fed funds rate with the improved performance of the U.S. economy," said Lonski.

Lonski also noted that the drop in unemployment and the rise in wage and salary income support the possibility of an improved holiday shopping season, but that consumer spending will probably stay at the same "superb" third-quarter rate. He expects holiday sales to grow by at least 5%, or even as high as 5.5%, annually, after the 4% increase in 2002.

Kleintop feels that consumers have felt better about their jobs not just because of Friday's report, but from the cornucopia of data over the past few weeks. "Consumers have felt more comfortable thanks to the strengths in back-to-school

shopping and the trends today bode well, too" he said.

A dark spot in the report continued to be the manufacturing sector, which shed 24,000 in October for its 39th consecutive monthly fall. The loss, however, was the smallest since July 2000.

Overall, the employment report "suggests that the summertime tax cuts succeeded at boosting economic activity by what's required to support a extended upturn by economic activity," said Lonki. "Companies were compelled to increase staff and payroll, which in turn improved outlook for consumer spending and thus tells us that these tax cuts are of lasting benefit and supply lasting stimulus to the U.S. economy."