Fed Most Likely on Hold at October 30-31 FOMC Meeting

Civilian Unemployment Rate: 4.7% in September vs. 4.6% in August

Payroll Employment: +110,000 in September, net gain of 118,000 new jobs after revisions of payroll estimates for July and August, with government sector tally accounting for 113,000 net new jobs

Hourly earnings: +7 cents to $17.57, 4.09% yoy change, cycle high was 4.28% yoy change in Dec. 2006.

Household Survey ??“ The unemployment rate rose to 4.7% in September compared with 4.6% in July and August. The unemployment rate has moved up gradually from a cycle low of 4.4% in March 2007 (see Chart 1). The rise in the unemployment rate was due mainly to a large influx of teenagers into the labor force who were unable to find employment. Thus, the September increase in the unemployment rate is less ominous than would have been the case had it resulted from layoffs of adult workers.

Establishment Survey ??“ Payroll employment advanced 110,000 in September after net upward revisions of 118,000 new jobs in July and August. These upward revisions were concentrated in the government sector (+113,000) and were attributed to school hiring. (As an aside, what does it say about our public school system if administrators have this much difficulty tallying up the number of employees on their payroll?) Total nonfarm payrolls have risen 1.19% on a year-to-year basis in September (see chart 2), the lowest since May 2004. Private sector nonfarm employment shows a similar deceleration from a 2.43% year-to-year gain in March 2006 (peak) to a 1.23% year-to-year increase in September (see chart 2). From June to September, employment growth averaged 90,000 per month; during the first 5 months of 2007, the average monthly gain was 147,000. In 2006, the monthly average increase in nonfarm payrolls was 186,000.Each of these measures sends a message of significant slowing in payroll employment. Moreover, in the 12 months ended September 2007, the birth/death adjustment represented 69% of the increase in nonfarm payrolls; in the 12 months ended September 2006, it represented 42% of the increase in nonfarm payrolls. In sum, the slowdown in nonfarm payroll growth being experienced so far this year may, in reality, be more severe than what is being reported because of an upward bias imparted by ???phantom??? jobs assumed to have been created by start-up businesses not yet covered in the BLS survey.

Factory sector employment fell 18,000 in September; the total number of factory jobs lost in the first nine months of the year is 148,000 jobs versus a reduction of 3,000 in the first nine months of 2006. Total hiring in construction fell 14,000 in September, inclusive of gains in the non-residential sector and losses in the residential sector. In the residential sector, employment declined 20,000. During the first nine months of 2007, jobs in residential construction have dropped 93,000 after adding 16,500 jobs in the same period of 2006 (see chart 3), reflecting the recession in the housing sector.

Service sector payrolls increased 143,000 in September, with government payrolls accounting for one-fourth of the increase. Retail employment fell 5,000, 4,000 jobs were lost in the financial industry, with offsets from 33,000 new health care jobs and 21,000 new hiring in professional and business services. The financial sector has posted a total loss of 28,000 in the August and September months which are most likely related to the financial market crisis. Temporary help, a leading indicator of employment, dropped 34,900 in September, with a loss of 202,900 in the first nine months of the year vs. a reduction of 23,800 jobs during the same period in 2006.

Hourly earnings increased 7 cents to $17.57 in September, putting the year-to-year gain at 4.09%. The earnings and employment numbers suggest an increase in personal income during September that is probably larger than the 0.3% gain reported for August. The steady reading of the manufacturing man-hours index points to a small increase in industrial production during September.

Conclusion ??“ The payroll tally for September, significant upward revisions of employment in July and August, the 0.6% inflation adjusted increase in consumer spending during August, and the nearly steady sales pace of autos in September (16.22 million units vs. 16.26 million units in August) are factors that have reduced the probability of a cut in the federal funds rate on October 31. That said, it is abundantly clear that a growth recession is underway. By cutting the federal funds rate by 50 bps in one fell swoop on September 18, the FOMC has bought itself some time to watch developments in the economy. We believe that further weakness in economic activity will appear in the weeks ahead, which will induce another cut in the federal funds rate at the December 11 FOMC meeting.