October’s employment report beat forecasts by a wide margin, and Ryan Sweet, chief economist at Oxford Economics, says it shows a labor market regaining its footing and opening the door wider to more rate hikes ahead.
Payrolls rose 165,000 and the unemployment rate slipped to 4.1% from 4.2%.
“This definitely came in stronger than everybody expected. It was more than double what we were forecasting,” Ryan says. “But we do know that these monthly job numbers can bounce around from month to month. A lot of volatility in them, a lot of noise.”
”I think what’s the most encouraging is that if you look over the last three or six months, the pace of job growth is clearly accelerating,” he says. “I think it’s pretty encouraging that the job market is starting to find maybe a little bit of a rhythm after going through a little bit of a lull several months ago.”
The economy needs only 30,000 to 40,000 new jobs a month to hold unemployment steady, Sweet noted, so 165,000 is a solid number. Hiring, long concentrated in education and health care, is beginning to broaden. Retail was strong in October, possibly because holiday hiring started early. Weakness remains in tech and finance, where AI adoption is costing jobs, while construction workers are shifting from a frozen housing market to data center projects.
Average hourly earnings posted a solid gain, but Sweet does not see wages as an inflation threat. Nominal wage growth of about 3% is below the roughly 4% that would match the Fed’s 2% target, given productivity trends. “The labor market is actually disinflationary; it’s putting some downward pressure on inflation.”
The real problem, he says, is three supply shocks lifting goods prices: lingering tariff effects, an energy shock tied to the war in the Middle East, and the AI build-out. “The Fed has a good grasp on how to control demand-side inflation pressures. The supply shocks, the Fed really can’t do that much about.”
Initial jobless claims have held at or below 200,000 for eight straight weeks, near their lowest since 1969. Sweet credits employers’ reluctance to lay off workers more than immigration curbs, though he said tighter immigration policy has slowed labor force growth. “Low initial jobless claims is just a reflection of [the] low firing economy that we’ve had for years now. This predates any shift in immigration policy.”
Oxford Economics expects the Fed to raise rates in December and again in March. Sweet argues that the economy is less sensitive to interest rates than it was decades ago, so policy may need to be tighter to bring inflation back to 2%.
“The Fed might have to push a little bit harder on the brake to get that inflation back down to where it wants to be.” After those hikes, he expects a lengthy pause, followed by rate cuts.
Sweet says the midterm results don’t change his baseline, which already assumed divided government. “With a divided government, the Trump administration is going to focus on things that they can control. That’s tariffs. That’s foreign policy. That’s immigration policy as well [as] regulation.”
He names immigration among the areas most likely to see changes but did not say which way border policy would move. On tariffs, he expects more rather than fewer, as the administration seeks revenue.
Ryan does not predict whether a Democratic-controlled Congress would bring a quicker end to the Iran war, and the war in Ukraine did not come up. But he says ending the Middle East conflict would “make a big difference on the inflation front.” Diesel, jet fuel, and gasoline costs feed into shipping, airfares, and food prices with a lag. With U.S. refineries running above 90% of capacity, any supply disruption keeps those prices higher for longer.
Stronger jobs report than expected…and accelerating 00:00:59:15 –
Yeah, this definitely came in stronger than everybody expected. It was more than double what we were forecasting. But we do know that these mostly job numbers, they can bounce around from month to month. A lot of volatility in them, a lot of noise. But I think what’s the most encouraging is that if you look over the last three, six months, the pace of job growth is clearly accelerating.
Job Market heats up- 00:01:20:0o
So I wouldn’t say that the low hiring, low firing narrative is completely behind us. Maybe we have a warming in hiring. I think that’s over the last few months, and I think it’s pretty encouraging that the job market is starting to find maybe a little bit of a rhythm. After going through a little bit of a lull several months ago.
Breadth, is it improving? 00:02:00:06
Yeah, I think on the surface 165 is it’s a good number. I mean, we put that in the context. The economy only needs to create about 40, 30, 40,000 jobs per month to keep the unemployment rate stable. So that’s why you’ve seen the unemployment rate, you know, tick lower recently. The one concern has always been the breadth of job gains. So how many industries sectors are adding jobs. It was pretty narrowly focused. It was typically so education and healthcare was doing the bulk of the heavy lifting. You’re starting to see a little bit of evidence that job growth is spreading out, but there are still pockets of weakness. And there’s a lot of, you know, movement within the labor market.
Lots of labor market churn; repurposing workers 00:02:41:03
Let’s pick on construction for a second. So the housing market I would just probably describe as ice cold. We have mortgage rates that are very high. Housing transactions are low. We’re not building a lot of multifamily or single family homes. Typically you would see construction employment decline, but a lot of workers that would be building homes have been shifting to data centers. And you can see that in nonresidential specialty contractors versus residential specialty contractors. So there’s a lot of churn and movement within the labor market. And I think that’s one reason we’ve been weathering those high interest rates environment reasonably well.
A job market tale of winners and losers 00:04:04:12
It’s very rare that you see the US labor market firing on all cylinders. And it’s not firing on all cylinders now. And I wouldn’t expect it to do so over the next couple of years. I mean we’re going to have winners and losers within the labor market. You know, you are seeing some AI related job cuts.
Shifting job creation by sector 00:04:21:23
You see some weakness in employment in tech and finance, which are very strong adopters early on with with AI. But the good news is that there’s jobs that are being created elsewhere in the economy. Now, you know, leisure and hospitality had a rough month, but generally that’s creating, you know, a good chunk of jobs month in, a month out.
Seasonality of hiring shifts forward 00:04:39:24
Retail was pretty strong in October. We’ve got a caveat that with, you know, holiday shopping season seems to be starting earlier in the year, every year. I mean, we were going out and buying holiday or Halloween candy for the kids and Christmas trees were already out. And holiday shopping season is probably getting into full swing soon. So I thought maybe brought forward some hiring and retail and general merchandise couriers, for example.
Labor market is disinflationary 00:06:23:05
Yeah the Fed’s in a tough spot because you know on one hand the labor market is clearly not inflationary because you have <modest> nominal wage growth. We’ll just rounded say it’s 3% based on trend productivity in the Fed’s inflation target. We should have nominal wage closer to four. That would be consistent with inflation that the Fed’s 2% target. So the labor market is actually disinflationary, putting some downward pressure on inflation.
Fed has multiple shocks driving prices up 00:06:48:10
And you see it in the services and side of the inflation data. The problem that the Fed has is that there are three supply shocks that are boosting goods prices. There’s still some lingering effects from tariffs. That’s driving up prices. You have the energy price shock which is got a long shadow. And that’s a reflection of what’s going on with the war in the Middle East.
AI build out &productivity in progress! 00:07:09:04
And then AI, the AI build out is inflationary in the near term disinflationary in the medium longer term as the stronger productivity numbers start to put some downward pressure there. The Fed has a good grasp on how to control the demand side. Inflation pressures… the supply driven supply shocks. The Fed really can’t do that much, much about that.
Affordability issue will linger 00:07:32:11
So that’s going to continue to linger. And that’s why this affordability issue is going to remain at the forefront. Because inflation is going to it’s going to take time to get it back down to where the Fed wants it to be.
Data watching-inflation in focus 00:07:55:07
We have two more rate hikes in our forecast. We have one in December, one in March, and I think another I think all the focus, you know for Fed watchers is okay what’s the inflation numbers. And next week we’ll get a new. CPI.
Is the issue inflation or whether policy is restrictive? 00:08:07:21
The CPI the consumer price index. But I think a bigger question is how restrictive is monetary policy in the context that macro regimes change and the US economy is one today where it’s much interest rate or it’s less interest rate sensitive today than it was 20, 30, 40 years ago. So the fed might have to push a little bit harder on the brake to get that inflation back down to where it wants to be.
Is the Fed two rate hikes away from knowing it is restrictive? 00:08:32:07
Because, you know, if you kind of look at essentially a cone of confidence of, you know, where monetary policy is restricted, we’re probably at the lower end. So two more rate hikes probably get the Fed a little bit more confident that monetary policy is going to start doing its job and getting inflation down.
Jobless claims a favorite indicator 00:09:09:02
My favorite economic indicator is jobless claims. It outside of hurricanes, outside of, you know, some holiday quirks here and there. Jobless claims don’t send too often very false signals. If there’s something wrong in the labor market, you’re going to see it reflected pretty quickly in weekly jobless claims. And when people start filing for unemployment insurance benefits, and keeping in mind that this is the counting, the number of people are filing, not necessarily receiving them, but that sends, you know, a pretty clear indication that something is afoot in the labor market.
Shifting trend in claims and in immigration 00:10:28:08
Well, I think immigration is clearly having an impact on changes in immigration policy on the labor market. I mean, labor force growth has slowed quite a bit over the last 12, 18 months. But it’s hard to say. And this is, you know, I like to try to focus on what we can quantify whether or not low jobless claims is attributed to this shift in immigration policy.
Continuing Infrequent layoffs 00:10:51:05
I’d be a little bit skeptical, but we want to do the work and try to test that. I think low or low initial jobless claims is just a reflection of low firing economy that we’ve had for years now. This predates any shift in immigration policy. Businesses are just very reluctant to lay off workers. I mean, maybe part of the explanation is that they got shellshocked after the pandemic.
Long watched metrics ae=re changing 00:11:14:18
You know, there was that big search and hiring was very difficult to find workers. Now, going forward, are we always going to have initial Jobless claims below 200,000? Probably not. I think that’s unrealistic expectation. You know, one concern that we have is that this this period where we’re shifting and adopting AI more is that that transition period could be a little bit more uncomfortable than what I think we’re expecting, because you’re going to see AI, unfortunately replace certain jobs.
Change is always part of the labor market 00:11:43:15
It’s going to change how we work. And if we do get a period where there’s an economic downturn, that’s when you’re going to see more likely. A lot of the AI related layoffs go back to the late 1990s, when Expedia came in, wasn’t when it came into existence that you saw those layoffs in travel agents. It was in the 2001 recession.
AI takes its toll a little at a time 00:12:43:08
So you have to have a lot of humility in doing this because we don’t have a lot of the sample size is so small. Know with each passing month, we’re getting more and more data points. But if you look at the one thing that we do is we dig into the BLS microdata and you can kind of map those, you know, occupations that are most exposed to AI.
Ai losses already are evident 00:13:05:00
And when you do that exercise, and now with the understanding that what is exposed to AI seems to be changing on a week-to-week basis, month-to-month, AI exposed employment is falling. They’ve been shedding 50,000 to 60,000 jobs a month in a month out. But we’re adding more jobs outside to help offset those layoffs. So I don’t I wouldn’t want to downplay saying that AI is not having an impact on the labor market, clearly is. You just have to look very granular to see the effects on the labor market from AI.
Trump will focus on what he can control 00:14:20:03
Odds are that fever will break at some point, and data center investment will continue to grow at a pretty decent clip. But, you know, that’s something that we have to keep a very close eye on. With a divided government, the Trump administration is going to focus on things that they can control. That’s tariffs. That’s foreign policy. That’s immigration policy as well in regulation.
Trump and tariffs? 00:14:37:20
So those are the areas that we most likely see some potential changes. Now will the outcome of the midterms. And we chatted about affordability earlier incentivize the Trump administration to reduce the tariffs. That’s a big question mark. I think more likely they would probably do more tariffs to kind of increase additional revenue.
Geopolitical impacts 00:15:39:18
Yeah, we have periods of these geopolitical conflicts. You know, the channels through which it can work, feed back into the US economy, primarily go through financial market conditions. And now we know prices from time to time really influence how the stock market does what it’s doing to the long term interest rates, Fed policy be inflation and affect the economy through the trade channel. But that’s very, very small impact on the US. We do very little trade with the GCC and with Iran banking systems. Fine. It’s confidence as well. You know, if people can and businesses see all this uncertainty and they can just delay hiring, delay their investment. But I think that’s a small drag. But the other thing that’s really important is that we have to look at the sensitivity of the US economy to all prices.
The energy share of spending has been falling 00:16:30:15
And this isn’t your father’s 1970s, 1980s, you know, price shock, consumer spending on energy all in think, you know, heating oil, gasoline. That share has been dropping for decades. And it’s very, very low. That doesn’t mean I’m saying that it doesn’t hurt. We all feel it. When gasoline prices go up, every penny increases in gasoline prices, cuts into consumer spending by 1 to $1.5 billion over the course of a year. But the the the number of barrels of oil needed to produce $1 of U.S. GDP is dropped. So we’re a little bit more immune. The labor market impact was much larger in the 70s and 80s than it is today, essentially neutral because of all the investment in mining equipment, shafts, wells in the US.
Knock-on effects form energy prices and lags… 00:18:17:22
We make a big difference on the inflation front, because thinking about those three shocks that have caused core inflation, which higher energy prices are boosting core inflation through transportation costs. Look at airfares, for example, diesel prices, higher diesel prices, anything that we are buying online is going to be more expensive because the cost of shipping is higher. And, you know, one element of this energy price shock is timing. There’s there’s a lot of lag. So diesel prices go up. But we don’t feel that effect for a few months down the road. And we’ll see it in higher food prices. So you know, if prices if diesel prices, if retail gasoline prices and jet fuel prices came down, that would take will help cool some of the inflationary pressures that many consumers are unfortunately feeling.
Energy prices running at full tilt no spare capacity 00:19:06:15
And it’s not necessarily prices that we’re paying the most attention to. It’s diesel. It’s it’s retail gasoline prices. It’s jet fuel. Because at least in the US, capacity utilization for refineries is essentially north of 90%. So they’re running full tilt. So any supply disruption, it’s going to keep these prices higher for longer okay.
The Fed will make policy restrictive and then wait on it 00:20:06:21
Yeah. I mean, it boils down to when your forecast and you forecast what the fed will do, not necessarily what they should do, but two more rate hikes I think that gets them comfortably in that range of where policy is restrictive. And then they’re going to pause for a while and they’re going to sit tight and, you know, want to reassess and make sure that inflation is moving back down towards their target.
More frequent supply shocks 00:20:28:02
They didn’t over tighten and upset the applecart with the labor market, and then they’re going to start cutting, you know, after they pause, the next move is going to be cutting. And I think this is one dynamic with regards to these policy monetary policy cycles going forward, is that the world that we live in now and the economic regime is more frequent and adverse supply shocks.
The next shock is just around the corner 00:20:49:13
And clearly the central banks across the world is not just the Federal Reserve. Many of them are realizing that, you know, the next shock is just around the corner, and they’re going to be tightening into supply shocks, more likely or more in the future than they have in the past. To these ups and downs and monetary policy are going to get much more compressed, given that we’re in a world of more supply shocks.
Ryan Sweet is the Chief Economist | Managing Director at Oxford Economics where he helps shape and coordinate the team’s global economic analysis and forecasting. Previously, Ryan was the Chief US Economist and led a team that was among the most accurate high-frequency forecasters of the economy.
Prior to joining Oxford Economics, Ryan spent 17 years at Moody’s Analytics as a member of the U.S. macroeconomics team and was also a co-host of the Inside Economics podcast. Ryan has also been an adjunct professor in the Economics and Finance Department at West Chester University of Pennsylvania.
Ryan received a master’s degree in finance from Johns Hopkins University, a master’s degree in economics from the University of Delaware, and a bachelor’s degree in economics from Washington College.