What the October Jobs Data Means for the Fed

In last month's report, the rate of civilian labor participation fell further, perpetuating a multiyear trend that is of concern for both the current and future growth potential of the economy. At 62.4 percent in September, the rate is at its lowest since October 1977. In addition, the employment-to-population ratio edged lower, to 59.2 percent.

The Fed both desires and needs a reversal in these trends because it would indicate the healing economy is — finally — encouraging more people to re-enter the labor force, enhancing its production potential. A notable improvement in the participation rate also would cause the Fed to delay a rate hike because the central bank would fear the negative economic consequences of what would be a premature tightening of financial conditions.

However, if the report for October indicates that these rates remain stuck at the prevailing low levels — or worse, are declining even further — the policy implications would be different: There would be heightened worry the labor market faces impediments to growth that are more structural than cyclical that couldn't be fixed by loose monetary policy alone. That, in turn, would fuel additional concerns about the collateral damage and unintended consequences of an economic policy stance that has relied too long and too heavily on unconventional monetary measures. Wage Growth
Despite the job creation of the last two years and the decline in the unemployment rate, wage growth remains frustratingly sluggish. Total earnings fell in September, reflecting both a decline in the average work week (by 0.1 hours to 34.5 hours) and in average hourly earnings (down 1 cent down to $25.09).

The Fed already seems somewhat confounded by the failure of inflation to trend up to its 2 percent target, and continuously sluggish wages would act as a disincentive to normalizing interest rates. If, however, the September declines proved both temporary and reversible, the institution's explicit dual mandate, as well as financial stability considerations, would signal the need for a hike.

It is hard to predict how these three data points will show up in the October jobs report, particularly in light of the uncertainty about the functioning of the U.S. economy and the complications caused by a fragile global economy. At the same time, it is regrettable that a single set of readings in a traditionally noisy date series potentially could have such an influence on decision making at the Fed. Yet that is where we are; and, depending what Friday's report tells us, some sharp market moves could be in store, especially given that markets have priced a balanced 50/50 probability of an interest rate decision.

– The monthly employment report will appear here on the Bureau of Labor Statistics website.

— Check out Can Treasuries and Bunds Keep in Lockstep? on ThinkAdvisor.