United States

October jobs report bodes well for middle market firms

Small and middle-sized firms the primary catalysts behind improved hiring

INSIGHT ARTICLE  | 

The U.S. economy has finally found its footing after a rough five years in the wake of the Great Recession. While some may be disappointed by the top-line growth rate of 214,000 new jobs added in October, which was well below the consensus forecast of 245,000, once one lifts the hood and takes a look at the underlying components the labor narrative is actually one of an improving economy and steady job creation that should persist throughout the remainder of this year and into 2015. The report comports well with the recent ADP estimate of private job creation and shows that small and middle-sized firms are the primary catalysts behind the sustained improvement in hiring.  Based on the ADP survey, small and middle-size firms were responsible for the creation of 97 percent of all private sector jobs. The composition of hiring during the past year and the coming increase in rising wages bodes well for middle market firms and indicates a broadening of prosperity throughout the real economy.

Small and Medium Firms Lead the Way in Hiring

Source: McGladrey, ADP, BLS

While this is largely a status quo report for the data-dependant Federal Reserve, it wouldn’t be surprising to see the Fed raise rates at its March 2015 meeting if this level of job creation and the subsequent potential for rising wages persists. The market is currently pricing in a rate increase at the June meeting.

The total change in employment, including the upward revision to September’s job gains to 245,000, presents an average growth of 4 percent during the past two quarters. Meanwhile, the decline in the unemployment rate to 5.8 percent was caused by a statistically significant increase of 683,000 in the Bureau of Labor Statistics (BLS) household survey and an increase in the labor force to 416,000.

The October kickoff to the traditional holiday hiring period means low-wage job creation surged. However, the economy has generated 1.19 million high-wage jobs versus 1 million low-wage jobs during the first 10 months of the year. The employment-to-population ratio of those aged 25-34 increased to 76.2 percent, the first time that has stood above 76 percent since 2008. Those working part time for economic reasons remained essentially unchanged at 7.2 million. Thus, 2014 has truly marked a turning point in the current business cycle that had previously been characterized by low-wage job creation.

High-Wage Jobs Outpacing Low-Wage Jobs

Source: McGladrey, BLS

Meanwhile, stagnant wage gains continue to preoccupy policy makers at the Federal Reserve. Average hourly earnings increased just 2 percent on a year-ago basis, which is in line with the cyclical trend. However, average weekly earnings jumped 0.4 percent month-over-month and were up 2.6 percent on a year-ago basis. This is typical of the wage growth that traditionally occurs when the official U-3 unemployment rate drops below 6 percent. As a result, growth in average hourly earnings, wages and salaries should begin to increase during the next year, which bodes well for additional repair of household balance sheets and modest gains in consumer spending and economic activity.

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