Stocks Bounce Back On Strong Jobs Report

The strong jobs report confirms that the U.S. economy’s fundamentals are strong enough to sustain its positive momentum despite the sub-par outlook for its trading partners in Europe, Japan and China. This report also shows that the soft reading for the preceding month was an outlier.

A total of +248K jobs were created in the economy, materially above consensus estimates of around +215K. Importantly, last month’s surprisingly weak +142K reading got revised higher to +180K, confirming beyond any doubt that August’s off-trend number was just a data fluke. Since monthly jobs numbers get revised twice in the following two months, I wouldn’t be surprised if the August number gets revised higher some more in next month’s release (July got revised higher as well – up +243K now vs. +212K on second look).

Private sector jobs totaled +236K in September, up from the upwardly revised +175K in August. The September gains were broad-based, with the gains concentrated in professional and business services, retail and healthcare. Professional and business services jobs increased by +81K in September, up from the 12-month average of +56K, with the gains coming from employment services (+34K), management and technical services (+12K), and architectural and engineering services (+6K). Manufacturing jobs didn’t change much in September, confirming the pullback we saw from the corresponding slide in the ISM survey, while construction jobs increased by +12K.

The weakest part of the report is the lack of income gains, with average hourly earnings essentially unchanged at $24.53. On a year-over-year basis, average hourly earnings are up +2%, in-line with the trend that we have been seeing since 2010 and below the pre-recession level of gains in excess of +3%. The hope has been that as the unemployment rate keeps coming down, it dropped a bigger than expected two ticks in September to 5.9%, employers will need to pay up to entice new workers.

That hasn’t happened yet. Contributing to the stagnant wages is the lack of high-paying manufacturing jobs (there were none in September) and the preponderance of low-skill jobs in retail, hospitality and other such industries. The labor force participation rate of 62.7% changed little from the three-decade lows in September. The Fed Chairwoman indicated in her last press event that the Fed considered a big driver of the low participation to be structural, meaning reflective of demographic changes.

In corporate news, the previously disclosed data breach at J.P. Morgan (JPM) has turned out to be a lot bigger than initially estimated, with up to 76 million households at risk of having their details compromised. This comes after similar issues at Target (TGT) and Home Depot (HD), indicating that companies will need to take the issue of security far more seriously than has been the case thus far.