Surprising Job Report

Today's U.S. employment report was much stronger than I expected. Unemployment fell from 4.6% to 4.4% as the number of employed in the household survey rose 0.3%. The headline payroll survey number was a lot weaker, but combined with upward revisions of previous numbers and the increase in the average work week, it still meant a strong increase in hours worked. In addition to all of this, average hourly earnings rose 0.4%.

A very strong number indeed. The one you would have expected from a booming economy, not one steadily weakening as implied by the 1.6% growth number and the 51.2 ISM index for October and a otherwise consistent series of report showing rapidly decelerating growth.

How to explain this anomaly? One possible explanation is that either the production numbers underestimate production growth or that the employment report overestimates true employment growth or perhaps a combination of the two.

The other possible explanation is that both of these numbers are basically correct and that productivity is declining and profits falling even steeper in the fourth quarter than yesterday's productivity and labor cost report indicated for the third quarter. While that would presumably be cheered on by those who think that labor have received too little of economic growth compared to capital, it could be ominous for the outlook of business investments. It could also mean that price inflation could pick up further.