You Won't Like Next Month's Jobs Report

NEW YORK ( TheStreet) -- Beware of November's jobs report.

While economists, investment analysts and traders cheered the surprising 204,000 jobs added in October, many of them cautioned that the government shutdown could have a lagging effect on the labor market.

"It sort of proves the case, given the revisions, that we had strength heading into the shutdown," Liz Ann Sonders, chief investment strategist at Charles Schwab, said in a phone interview. "It may be a little too soon to say there was no effect from the shutdown, because we'll have to see what happens next month."

Economists were expecting nonfarm payrolls to rise just 120,000 in October and for the unemployment rate to gain to 7.3%. The rate rose to that level as expected, but the topline jobs number beat forecasts as economists may have overestimated the immediate effects of the 16-day shutdown.

A deeper dive into the numbers revealed some weak spots in the report. The U-6 measure -- total unemployed, plus people marginally attached to the workforce, long-term unemployed and part time -- ticked higher to 13.8%, from 13.6%. The labor force participation rate declined to 62.8% from 63.2% -- a drop that actually may have prevented the unemployment rate from rising half a percentage point, said Darrell Cronk, regional chief investment officer.

Republicans and conservatives have been among the most vocal critics of the steadily lowering participation rate, and have said it suggests that the protracted slow economic regrowth in the United States has left workers looking for work discouraged. While the GOP has used the indicator as a political tool, economists of varying disciplines generally agree the decline has been alarming.

Still, the labor force participation rate can't be cited as the main culprit.

BlackRock Chief Investment Strategist Russ Koesterich said the participation rate has been falling for 13 years, and while the current economic circumstances are contributing to it, there are changes in how long people go to school, and an ageing population. It's not just what happens month to month, there are longer-term structural forces at work, Koesterich said.

As for Friday's jobs data, managers on the ground said they weren't surprised by the big data beat and warn that a pullback could come in November's headline number, set to be released next month.

Mike Starich, president of Orion International, which is the largest military recruiting firm in the United States, said August and the first half of September were strong interview months, which were followed by hires in October -- in other words, there's a lag between the interview and the start date of employees. Starich said he saw activity sharply contract heading into October.

"All the folks that we had in the interview pipelines, everything started to change as October approached ," said Starich. "Everything just sort of iced over, and now it's releasing ever since the debt ceiling was resolved - the ice is breaking."

Employment gains in leisure and hospitality (53,000) and retail (44,000), outpaced professional and technical services (21,000) and manufacturing (19,000).

"This is a 2% economy," said Steve Blitz, chief economist at ITG Investment Research, referring to the slow, steady rising trend in gross domestic product. "We're seeing numbers that give us growth in employment, but not growth in high quality employment in terms of higher wage jobs."

This continues to be the case with employment reports month-to-month: We see growth in payrolls, a dip in participation and little change to the unemployment rate. It's a new normal for Americans, most of whom have never experienced half a decade straight of 7%-plus unemployment.

But the labor and economic recovery won't be fully realized until next year, said Shang-Kin Wei, director of the Chazen Institute of Business at the Columbia University Business School. Weo said businesses are reasonably optimistic about the next 10 years, and that the slow growth of sub 3% GDP may be behind us in three years. In fact, Thursday's upward GDP revision to 2.8% may have hinted at a turn, though economists were worried by the weak consumer spending rate in the report.

Fundamentally, the jobs reports are positive and show that the United States is moving in the correct direction since the financial crisis.

Whatever the case may be, analysts seemed content with Friday's jobs report. But those celebrations came with a disclaimer that the government shutdown effects will enter the data by the next report.

The positive print suggested the Federal Reserve could begin to taper sooner than expected, but the central bank will have the advantage of getting one more set of monthly labor data to determine if this was a one-hit wonder, or the beginning of a robust trend.

-- Written by Joe Deaux in New York.

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