The Labor Department last week reported the strongest jump in payrolls this year, some 271,000 in October, the fastest rate of wage increases since 2009. Unemployment fell to 5 percent from 5.1 percent. Average hourly earnings rose to $25.20, lifting gains to 2.5 percent for the last 12 months.
Job growth in October was focused in the private sector, which added 268,000 jobs. Government payrolls grew by only 3,000. A broad measure of unemployment that includes Americans stuck in part-time jobs or too discouraged to look for work fell to 9.8 percent, the lowest level since May 2008.
Most economists now feel that these data provide a green light for the Federal Reserve’s Open Market Committee to raise short-term rates 25 basis points before the end of the year. This will be the first increase of interest rates since 2006.
For months there has been a stand off between policy hawks that favor an increase in short-term rates and the doves that wish to postpone it. The doves’ reluctance reflected in part their concerns that job growth had slackened in August and September. They also worry that if we cause the value of the dollar to rise too much, it could roil world markets.
Joseph Carson, an Alliance Bernstein economist, wrote in an analyst note: “From all sides, the October employment number is very strong. The Federal Open Market Committee has no more excuses of delaying a gradual normalization of official rates.”
Fed chairwoman Janet Yellen told a panel on Capital Hill last week that an increase in interest rates in December “was a live possibility if the economy continues to perform well.”
Before the Fed increases rates at its meeting in December, there will be one additional jobs report, for November. This gives Yellen some latitude
But according to Bloomberg News, traders see a 70 percent likelihood that the Fed will raise its benchmark rate from near zero.
According to Thomas Simons, a government-debt economist for Jefferies Group: “It is definitely a hurdle that is out of the way. The November report does not have to be a blowout to justify an increase in December. It really does check a lot of boxes for the Fed: good wage data, good payrolls.”
Effects of rise in rates
The next question is how fast and how far will the Fed raise short-term rates?
Most economists believe, and Fed officials have said, that the rate increases will be gradual and will not go above 3 percent.
What changes can we expect on a personal basis?
A rise in short-term rates will be beneficial for savers, who will get a higher return. On the other hand, borrowers will incur greater costs. This could negatively affect the housing and automobile industry because their products will become more costly.
The outlook for stocks in a higher-interest-rate environment is uncertain. At the margin, there will be some transferring of investments from stocks to bonds. Stock bulls argue that higher interest rates mean a stronger economy and therefore higher corporate earnings.
Part of America left behind?
The jobs report included a point that bears greater scrutiny.
Nearly all the positions added in October, whether entry-level or for more experienced workers, required at least a bachelor’s degree. This highlights how crucial credentials and specialized skills have become in today’s job market.
Sadly, we are learning when it comes to jobs, a rising tide does not lift all boats. The economic and demographic data released last week was not all sunshine and oranges. A study by Anne Case and Angus Deaton, both economists at Princeton, found that the mortality rates for middle-aged white Americans aged 45 to54 without a college education had risen since 1999. This contrasts with the rising life expectancy for other racial groups and for virtually every other affluent country. Rising suicides, increased substance abuse, including alcohol-related disease and painkiller overdose, were the primary culprits.
A full explanation for this is out of reach at this point, but this demographic group has faced a rise in economic insecurity because of a collapse of well-paying jobs for blue-collar workers. In addition, the decay in some communities and the breakdown of families means isolation rather than a helping hand.
Angus Deaton, the 2015 Noble Laureate in economics, wrote: “Half a million people are dead who should not be dead.” Deaton is worried that this is an epidemic that threatens America’s future.
“Fools rush in, where angels fear to tread,” but let me suggest some possible remedies. We need to provide more vocational education services so the unemployed and underemployed can become useful again, and we need to provide additional social services to address workers’ alienation.
Originally published in the Sarasota Herald-Tribune
