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Hurricane-damaged jobs number won't sway the Fed from rate hike

Key Points
  • October's job growth was less than expected at 261,000, but economists are writing off both September and October employment reports as being distorted by the impact of hurricanes Harvey and Irma.
  • The unemployment rate fell to a 17-year low, but that was because of a sharp drop in labor participation, also seen as a temporary blip by economists.
  • Wage growth was also a negative surprise, coming in flat in October.
  • The Fed is expected to look past the report and raise interest rates, as expected, in December.

October's flat wage growth and big drop in labor participation look like negatives for an economy that has been steaming along, but economists are writing it off as storm damage and expect the Fed to raise interest rates.

October job growth was 261,000, less than the 310,000 expected by economists in a spring-back from September's hurricane-related decline. September data was revised upwards by 51,000 jobs, so job creation is now a positive 18,000 for the month. Job growth for the two months averages 140,000, below the recent trend.

Construction workers move materials at a work site for a new condominium and retail complex in Portland, Oregon.
Richard Clement | Reuters

The unemployment rate in October fell to 4.1 percent, a 17-year low, from 4.2 percent, but economists point to a decline in the participation rate of 0.4 to 62.7 percent as the cause. Wage growth was flat after a surprise 0.5 percent gain last month.

"We just had a lot of people drop out of the labor force. The size of the labor force fell 765,000. ... It looks to me like a lot of seasonal workers probably fell out this month, and that explains the participation rate," said Ward McCarthy, chief financial economist at Jefferies.

McCarthy said the number of workers that joined the workforce in September was unusually high. "I think you should look at the two [months] combined which gives you a pretty solid, steady state."

Stocks barely budged after the report, and the 10-year yield and 2-year yields held steady. The 2-year, at 1.61 percent, is the most responsive to Fed rate hikes, and traders said it was indicating no change in view on the Fed's expected December rate hike.

"Both the September and October numbers were too storm-damaged to put a whole lot of weight on them. From a big picture standpoint, these numbers largely met what I expected," said McCarthy. "I think we'll see them revert back to trend with the release of the November report next month."

Cathy Barrera, chief economist at ZipRecruiter, said she is watching that decline in participation among prime-age workers, 25 to 54, another measure that could be distorted by the impacts of hurricanes Harvey and Irma. The participation rate for that age group fell to 81.6 from 81.8 percent.

"This is something I want to take a look at next month," said Barrera. "This could be a blip. …From September 2015, there's been a steady increase in the labor force participation rate of these prime-age people."