Introduction

There's evidence now that the labor market may be at maximum strength relative to wages, that additional growth could trigger significant acceleration in wages. Yes, wages have been flat for years and a little growth couldn't be that bad, right' Yet the worry among the hawks is that wage-push inflation may already be baked in the cake, that the Fed has fallen behind the curve and may have to play a bumpy game of catch up with rate hikes. Still, a slow wage-push ascent is another possibility and of course there's a multitude of uncertainties to add to the mix (to say the least). But data dependent is data dependent and October employment, though only a single report, may very well be proof that policy makers have met their goals.

The economy

Average hourly earnings are accelerating sharply, to a year-on-year 2.8 percent to highlight what is a solid October report throughout. Going into September, the year-on-year rate had been stalled at the 2.5 percent line, and though the initial September estimate of 2.6 percent failed to raise much fuss, a revision to 2.7 percent combined with October's 2.8 percent have added a new urgency. The October rate is the highest of the cycle, since June 2009. This rate trended in the 3 to 3-1/2 percent zone through the latter part of the prior cycle (2007-2009), but the comparison of levels is much less interesting than the possible acceleration of the ongoing climb.

Month-to-month change in average hourly earnings has also been solid, up 0.4 percent in October for the strongest rate since early in the year and among the top rates of the whole series. And September's revision lifted what had been a lifeless 0.2 percent increase to a less-than-harmless 0.3 percent gain. And October, at plus 0.4 percent, even tops that. The 10 straight gains is the longest monthly winning streak of the cycle, since February 2010. Yet the appearance of wage pressure, however sudden, is really no surprise to the hawks on the FOMC. The unemployment rate, at 4.9 percent in October, has been within the FOMC's own longer-run range (4.7 to 5.0 percent) since way back in October last year. And not pointing to any easing in labor demand is how fiercely employers are holding onto their employees, evident in jobless claims which have been moving to record lows all year. The supply side of the labor market is being squeezed and the expected offsetting balance is an increase in labor costs. The report's other headlines included a net 44,000 upward revision to September and August payrolls and a no-fuss nonfarm payroll gain of 161,000 for October.

Wages may be going up but it's still early in the ascent, however steep or flat the climb may prove to be. Growth in the wages & salaries component of the national accounts has been stuck most the year, trending at a year-on-year rate of 4 percent which is down from the prior year's 5 percent trend. The latest update is to September and it will be interesting to see if wages & salaries pick up in line with average hourly earnings in the October employment report. If they do, it would mark a useful fourth-quarter start for the consumer and would be a plus for holiday spending.

Consumer spending hasn't been red hot this year but it has been improving, up 0.5 percent in September in what was the fifth solid gain in six months. Much of the strength in September reflected vehicle buying which looks to be an even more powerful plus in October. Unit vehicle sales posted a cycle best of their own in October, adding another 3 percent on top of September's gain to an 18.3 million annualized rate. Changes in unit sales, which are not in dollar terms and also include sales to businesses, do not always predict change for the motor vehicle component of the retail sales report but, given their strength in October, they may very well in this case. Consumers have jobs and they're committing to vehicle purchases. A strong October retail sales report, to be released at mid-month, would turn up expectations for fourth-quarter economic growth.

A lot of the jobs that consumers have (actually 103.1 million of them) are in the service sector which makes up 86 percent of all payrolls. Service payrolls rose 142,000 in October which is good but not spectacular, unlike for instance the gain underway in Markit Economics' U.S. services sample. This composite is on the move, rising two straight months and now at 54.8 to match the ISM's non-manufacturing composite which has been the much stronger of the two for the past year. Markit said respondents in its sample are talking about strength in consumer spending and expectations for a post-election economic bounce. And the ISM report, though slowing in October, remains very healthy with new orders and also export orders solid. Price readings for both reports, in details not to be missed by the FOMC, are coming alive.

Construction employment may also be on the move, up 11,000 for October after a 23,000 gain in September. Yet construction has been an uneven sector this year, showing only isolated strength and with related spending falling 0.4 percent in September for a year-on-year decline of 0.2 percent. Construction spending on single-family homes, despite strong demand, is down 2.9 percent year-on-year. Two areas of strength, however, have been spending on multi-family construction, where high rents are attracting investment, and also office construction where talk of isolated bubbles has been heard all year. Still, highway spending has been down as has spending on factories.

Factory payrolls are the disappointment of the October employment report, falling 9,000 for a third straight decline. At 12.3 million and sagging, factory payrolls make up 8.5 percent of total payrolls, down from 9.9 percent at the height of the last cycle in 2008. And a look at factory orders tells why. New orders did rise a moderate 0.3 percent in data for September, but core capital goods orders (nondefense ex-aircraft) fell a very sharp 1.3 percent to reverse earlier improvement. Weakness in capital goods points to continued trouble for business investment. And the first manufacturing indications on October are little better, as new orders in the ISM manufacturing report, at 52.1, fell a noticeable 3 points from September. Note in the graph that the zero line for monthly change in factory orders (left axis) is lined up with the 52 line for the ISM (right axis). This level, not the usual 50, is the one that the Census Bureau has determined matches no monthly change in the government's data, at least on average. But the track record is far from perfect with ISM predicting two phantom gains for May and June in a reminder that advance anecdotal data are just that, anecdotal.

Markets: When data are less important

Economic news wasn't the week's focus, rather the election on November 8th. Defensiveness was the trade with stocks down and bonds up. The Dow fell to four-month lows, down 1.5 percent on the week to 17,888, while the 10-year Treasury yield, pulled down by safe-haven demand, fell 7 basis points to 1.77 percent. Lower yields often make for weakness in the dollar as the dollar index ended the week with a 1.3 percent decline. Gold is the place to be right now, up 2.3 percent on the week and back over $1,300 at $1,305. Oil had a very bad week, down more than 9 percent at $44 and change.

The bottom line

Lost a bit in the week was the November FOMC meeting which, following the employment report and soon to follow next week's presidential election, seems like very old news. The vote not to hike rates narrowed to 8 to 2 but looks certain to make a seismic shift the other way at the December FOMC. The funds target is currently at 0.375 percent where it's been all year which is far far short of the 2.8 to 3.0 percent long-term range as defined by the FOMC itself. The path to policy normalization may begin in big chunks. But not so fast! There's still a November employment report to go, not to mention an election to decide.

Week of November 7 to November 11

Economic data will be thankfully light, clearing the stage for Tuesday's presidential election. Data that will be released will include NFIB's small business optimism index on Tuesday where the Econoday consensus is calling for slight improvement and consumer sentiment on Friday where, however, the consensus is calling for no improvement.

Monday

Consumer Credit for September

Consensus Forecast: +$18.7 billion

Consensus Range: +$16.5 to +$26.5 billion

Consumer credit is expected to rise $18.7 billion in September following August's very sharp increase of $25.9 billion gain. Revolving credit has been on the rise, up $5.6 billion in August, but non-revolving credit remains the central strength of this report, underpinned by student loans and also reflecting solid demand for vehicle financing.

Tuesday

Small Business Optimism Index for October

Consensus Forecast: 94.3

Consensus Range: 94.0 to 95.3

The small business optimism index is expected to rise slightly to 94.3 in October vs 94.1 in September. Plans to increase employment rose further in September while capital expansion plans were another positive. Current job openings have been especially strong in this report though they did slow in September. Earnings trends have been weak.

Wednesday

Wholesale Inventories for September

Consensus Forecast, Month-to-Month Change: +0.2%

Consensus Range: -0.2% to +0.3%

Wholesale inventories are expected to rise 0.2 percent in September, unchanged from the advance report on wholesale inventories. Wholesalers have been careful to keep their inventory growth at or under their sales growth though total inventories in the economy have been on the rise in what may be a near-term negative for production and employment.

Thursday

Initial Jobless Claims for November 5 week

Consensus Forecast: 263,000

Consensus Range: 255,000 to 265,000

Initial jobless claims have been tracking at historic lows and pointing to healthy conditions in the labor market. Forecasters see initial claims falling 2,000 in the November 5 week to 263,000.

Friday

Consumer Sentiment Index, Flash November

Consensus Forecast: 87.1

Consensus Range: 86.5 to 90.5

Consumer sentiment moved sharply lower through October, falling more than 3 points at mid-month then nearly another point at month end to track in the 86 area and a 2-year low. The expectations component was especially weak in October, pointing to weakening confidence in the jobs outlook. Little change is expected for the November flash, at a consensus 87.1, in a report that will offer an important early look at the post-election mood.