Last month, hurricanes wreaked havoc with the monthly payroll report. Headline job gains were actually negative, and the wage growth figure was probably skewed too high. So, in a sense, Friday's payroll report is really two reports in one.
We knew we'd get a rebound in job gains, but how big? We knew wage growth probably would not be as strong, but can we discern an overall trend? Here are some of my thoughts, plus a parting shot on Jay Powell being named Fed Chair.
Headline Job Gains
The Bloomberg economist survey was expecting a 313,000 payroll gain. I was hoping for more like 360,000, which would have gotten the rolling average monthly gain back above 160,000.
Overall, the economy seems to be gaining steam into the fourth quarter. That will ultimately necessitate either payroll gains to accelerate back to the 200,000 area (which in turn means people have to be attracted back into the labor force), or productivity going up.
In other words, for GDP to grow at a fast pace, we either need more people making stuff, or the people we have need to make more stuff per person. If I don't start seeing evidence of this, I'm going to assume that this recent acceleration is just the economy bouncing around, and not a sign of something more lasting.
Bad weather tends to cause wage growth to be inflated, since it is hourly workers who don't get paid when the business closes for weather reasons. For example, the bar might close and not pay the bartender, but even if the accounting firm closes for a few days, it still pays its salaried employees. So the bartender falls out of the wage survey, but the accountant does not.
That brings us to Friday's wage figure. While the 2.4% year-over-year number is down from September, it is a very encouraging result. My sense -- and this is admittedly based on anecdotes from company reports and not hard data -- is that there is meaningful upward wage pressure on the low end.
Middle and higher income wages seem to be growing at a steadier pace. That's great news for a lot of reasons. Earlier in this cycle wage growth seemed to be more concentrated. However, it may take time for enough actual wage hikes on the low end to pass through into the overall macro data.
As I wrote on Wednesday, I think this same thought is prevalent on the Fed, and is a major reason why they continue to favor hiking.
Thoughts on Jay Powell
I have written extensively about the race for the Fed Chair here on Real Money. Now that we know who the Chair will be, here are a few thoughts:
-- Continuity, to a point: The consensus that Powell will follow the same policy as Janet Yellen is only true to a point. All we really know is that Powell has broadly supported Yellen's strategy under current conditions. What would Powell do if inflation moved up to 1.8%? Or if it falls to 1.1%? I think it is presumptuous to assume he would act the same as Yellen in those circumstances. I think he will support two more hikes over the next two quarters, then it is all up in the air from there.
-- The rest of the board matters: Powell is not an economist, so more than usual, those with whom he surrounds himself will influence his policy-making. Smart money is on the board turning more hawkish, as economists favored by the GOP caucus tend to lean this direction. Don't rule out John Taylor getting the Vice Chair spot.
-- Will Yellen stay on the board? This is an interesting question. While her term as Chair is up, her term as a board member has many years to go. If she stays, will she have unusual influence as a former Chair? Or would she be marginalized as yesterday's news? My bet would be that she steps down, but we shall see.