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The Fed Is Boxed In

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And the box gets smaller as more data is released.

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Editor's note: The following is an edition of The Lavery Insight economic newsletter by former Merrill Lynch chief economist Jack Lavery. For more information, or to sign up for a free trial, click here.


The Bureau of Labor Statistics (BLS) released the October employment situation on Friday. Consternation at the market opening to the jump in the unemployment rate from 9.8% in September to 10.2% in October gave way quickly to a more balanced reaction as nonfarm payrolls continued to drop, but again at a slower pace.

Payrolls fell 190,000 in October, exactly the number we had forecast in our research piece a week ago. The 190,000 payroll employment decline was moderately worse than market consensus expectations, which envisioned a fall of 175,000. Manufacturing and construction led the October jobs drop.

It was encouraging that the August employment decline, previously reported at 201,000, was revised to less of a drop, 154,000, and September's employment fall, initially estimated by the BLS at 263,000, was pared to a 219,000 drop. That's 91,000 jobs in net positive revisions. Also encouraging was a 34,000 worker rise in the temporary help area.

The pace of employment declines has been slowing for roundly a year. Based on current BLS data, nonfarm payrolls dropped an average of 645,000 per month from November 2008 through April 2009. In the May through July 2009 period, payroll declines averaged 357,000, while in the last three months of data, August through October, the average monthly decline in payrolls slowed to 188,000.

Per BLS, in October, average hourly earnings for "production and nonsupervisory workers on private sector nonfarm payrolls" rose 0.3%. In the last three months, average hourly earnings have advanced at a 2.8% annualized pace. In the last 12 months, average hourly earnings have advanced 2.4%, while average weekly earnings have only increased 0.9% due to declines in the average workweek. In October, the average workweek stood firm at 33 hours. In manufacturing, the workweek rose by 0.1 hour to 40, and factory overtime increased 0.2 hours in October.

The unemployment rate is a lagging indicator, and will likely move irregularly higher prior to peaking around 11% in mid-2010. At 10.2%, the current unemployment rate is the highest since 1983, but still below the early 1980s peak of 10.8%.

The severity of the unemployment rate is, however, grossly understated by the headline measure of 10.2%, or 15.7 million people unemployed. It excludes the 9.3 million people working part-time, because their hours have been cut, or they're unable to find a full-time job. Another 2.4 million people aren't counted in the 10.2% headline, including people who have looked for a job within the preceding 12 months, but not in the four weeks before the latest monthly survey week. The 2.4 million figure above includes 808,000 discouraged workers who have given up trying to find a job because they believe there isn't one available for them. A more broadly defined measure of unemployment and underemployment measures 17.5%, higher than the 17.1% previous high in December 1982 for the comparable metric.
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