The delayed October employment report and the first read of third-quarter gross domestic product will probably show that the U.S. labor market slowed again last month and that the economy was losing steam even before the partial government shutdown.
The advance estimate for third-quarter GDP will be released Thursday at 8:30 a.m. EST. Economists polled by Thomson Reuters expect the U.S. economy to have expanded by 2 percent during the April-June period, slower than the 2.5 percent annualized rate recorded in the second quarter.
On Friday, the Labor Department will release the October jobs report, which was originally scheduled for Nov. 1. This report will be distorted in several different ways by the 16-day government shutdown (Oct. 1-17).
First, the establishment and household surveys have different ways of classifying workers. In the establishment report, employees are counted as on payroll if they receive pay during the survey week which, as usual, was the week containing the 12th of the month (Oct. 6-12).
While the nonessential federal employees were not at work during that week, they received back pay to cover the shutdown, so they will show up in the payroll survey. “This means there won’t even be a sharp fall in federal government payrolls,” Paul Dales, senior U.S. economist at Capital Economics, wrote in a note to clients.
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That said, state and local government payrolls may decline after some hefty gains in the previous two months, Dales added. But this would be due to the failure of the seasonal adjustment process to capture in full the start of the academic year rather than the shutdown.
Employers probably added 125,000 workers to their payrolls in October, according to the average estimate of 70 economists polled by Thomson Reuters. That’s lower than the already disappointing result of 148,000 job gains in September.
The unemployment rate is a different story, however. The shutdown will probably push the unemployment rate higher to 7.3 percent, from 7.2 percent in September. The unemployment rate is derived from a separate Labor Department survey of households rather than the payrolls tally.
While the household survey will count furloughed federal workers as employed, the household survey will record them as unemployed, according to the Labor Department’s fact sheet on how the shutdown will affect the October employment report. The same happened during the late 1995 and early 1996 shutdown. On that occasion, payroll employment continued to rise while household employment fell.
At the start of the recent shutdown, roughly 800,000 federal government employees were told to stay at home. But by the time of the reference week for the household survey, 350,000 civilian defense employees had been recalled to work. That suggests a maximum of 450,000 government workers will have been classed as unemployed.
That said, now that the shutdown is over and federal employees are back at work, “any fall in the household measure of employment and any rise in the unemployment rate will be reversed in November,” Dales said.
Second, these data challenges also complicate other aspects of the report. The Labor Department has noted that federal employees who worked fewer than 35 hours during the survey week may be counted as part-time for economic reasons, even though their positions remain full-time.
Additionally, Ethan Harris, co-head of global economics research at Bank of America, looks for average hourly earnings to grow 0.2 percent in October, faster than the 0.1 percent increase in September but in line with the average over the past six months.
Some may point to the delay in data collection and question the reliability of the October jobs report. Dales is firmly in the opposite camp. “It is possible … that this October’s payrolls data may be more reliable than usual,” Dales said.
The Labor Department addressed the issue of accuracy after the 1995-96 shutdowns and it concluded the data were no less reliable than usual. In fact, the delay of the December 1995 report by two weeks meant that the BLS received more responses to the payroll survey than usual, “enhancing the reliability of the preliminary estimates.”
Market sentiment around the Federal Reserve has swung dramatically in the past six months -- in the spring it was “QE infinity,” by the fall it was “tapering regardless of the data” and more recently some seem to again see QE infinity, Harris said.
With growth stuck in the low 2 percent range and inflation trending well below the Federal Reserve’s 2 percent target, the central bank hit the snooze bar again at its October policy meeting and pressed on with $85 billion in monthly bond purchases, saying it plans to "await more evidence that progress will be sustained before adjusting the pace of its purchases."
Goldman Sachs economist Jan Hatzius currently expects the Fed to start tapering quantitative easing, or QE, at its March 2014 Federal Open Market Committee meeting, when “the economy would probably be growing at a more robust 3 percent pace and the distortions to the economic data have washed out.”
If March is the correct start date for the tapering, Hatzius expects the QE program to end sometime in the fourth quarter of 2014.
The Fed has held interest rates at rock-bottom levels since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of QE.
"However, the March tapering forecast is conditional on the assumption that the next round of fiscal deadlines will prove less disruptive than the most recent set [of data],” Hatzius said. “If there is another lengthy debt ceiling fight that lasts until close to the March FOMC meeting, the tapering decision would likely be delayed even longer.”