December Fed hike remains on the table

The October payrolls report swung back to stronger-than-expected gains, with the economy adding 165,000 jobs, well above expectations of 70,000 and a meaningful pick-up from September’s softer reading. 

Notably, strong upward revisions to the prior two months reinforced the view that the underlying labor market remains resilient. This strength comes at a critical moment for investors amid recent market volatility and AI-led equity losses, suggesting that broad economic deterioration remains largely absent. 

This leaves inflation as the primary focus ahead of the Fed’s next meeting, particularly given the acceleration in wage growth. A December rate hike is firmly on the table.

Report details

• Total non-farm payrolls rose by 165,000, well above the expected gain of 70,000. Moreover, the prior two months were revised meaningfully higher, adding a combined 84,000 jobs. These revisions lifted the three-month average pace of payroll growth from 50,000 to 137,000, well above upper-bound estimates of breakeven employment, or the number of jobs needed to keep labor market conditions stable.
• October’s job gains were broad-based, with seven of the eleven major sectors adding jobs. Healthcare remained a key source of employment growth, showing renewed strength after several months of more moderate gains. Particularly encouraging were the strong gains in professional and business services, which posted the strongest hiring in several years. Employment also rose across several cyclical industries, including manufacturing, trade and transportation, and financial activities, consistent with solid underlying economic activity.
• Job losses were fairly contained. The leisure and hospitality sector posted the largest decline, shedding 13,000 jobs, though employment remains above last year’s levels. Construction employment also edged lower, though losses were concentrated in the residential segment. The technology sector, which saw only modest job losses, remains worth monitoring given its exposure to automation and AI tools. For now, however, evidence of broad-based and meaningful AI-related displacement remains limited.
• The unemployment rate declined to 4.1% from 4.2%, alongside an increase in labor force participation, which rose to 61.9% from 61.8%. Meanwhile, layoff activity remains muted, with initial jobless claims near historical lows. However, the duration of unemployment has continued to trend higher, suggesting that workers who have lost their jobs are taking longer to find new employment. Together, these dynamics point to a labor market that remains resilient without signs of renewed tightness.
• Average hourly earnings growth rose from the prior month and came in slightly above expectations. While the pick-up is unlikely to reassure policymakers that inflation pressures are easing, annual wage growth remains modest and well below levels associated with an overheating labor market, suggesting there is still little evidence of a wage-price spiral.

Policy outlook

While one strong data point does not establish a trend, today’s jobs report is a strong rebuttal to concerns that the economy is heading toward a meaningful slowdown. The resilience is particularly reassuring after yesterday’s sharp tech-led selloff. It reinforces the distinction between a market correction and an economic downturn.

For policymakers, neither the labor market nor the broader economy is likely to be a source of concern heading into the next FOMC meeting. Instead, inflation remains the key variable. With wage growth also picking up, a December Fed hike remains firmly on the table despite recent tightening in financial conditions.

Principal Asset Management