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The Labor Department did investors a solid on Friday by delivering an upbeat employment report supporting Fed Chair Jerome Powell’s prediction that a ‘full recovery’ for the labor market is on the horizon.

U.S. employers added 531,000 workers to their payrolls USNFAR=ECI last month, handily beating the 450,000 consensus and notching a 70.2% acceleration from September’s upwardly revised 312,000 job adds.

This was indeed a solid gain amid a labor drought that persists despite increased vaccination rates and a waning pandemic threat. With this report, all but 4.2 million jobs have been recovered from the 22 million-plus wiped away when mandated shutdowns shoved the economy into its steepest plunge on record.

“(The report) shows that we’re seeing the jobs market healing to the point where we could expect even larger gains next month as more people return to the labor force,” says Peter Cardillo, chief market economist at Spartan Capital Securities. “If these numbers continue at this pace, we could probably see full employment at the end of the first quarter.”

Private payrolls were the star of the show, jumping by 604,000 – well above estimates – and more than offsetting the 73,000 jobs shed by federal, state and local governments.

This helped the unemployment rate USUNR=ECI shave 0.2 percentage points to 4.6%, the lowest since March, and more than 10 percentage points lower than the April 2020’s head-spinning 14.7% apex.

What’s more, when broken down by duration, the mid-range share of the total grew, with newly unemployed and long-term jobless pie slices shrinking, suggesting that new firings and benefits expiration are losing steam as the chief drivers of the headline print.

But enough unicorns and lollipops. Let’s wander through the landmines.

Remember the falling unemployment rate? One reason for the decline is the dismal labor market participation rate, which stubbornly held its ground at 61.6%, well below the historical average.

When people leave the workforce they are no longer counted as unemployed. But the participation rate can’t stay in the ditch forever, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“The stimulus payments and extra benefits payments, alongside Covid fear, likely have allowed many people to sit outside the labor force,” Shepherdson writes. “But the money won’t last forever, and the U.S. is a difficult place to be voluntarily unemployed.”

Another fly in the merlot is wage growth, which has heated up on a year-on-year basis to 4.9%, a 0.3 percentage point acceleration from September.

The worker shortage has prompted U.S. companies to sweeten the pot to attract applicants and retain current headcount.

Rising wages puts “more money in people’s pockets which, under the right circumstances, should lead to higher living standards,” notes Russell Price, chief economist at Ameriprise Financial Services.

But this phenomenon could test Powell’s repeated mantra of “transitional” inflation, as wages are less elastic than gasoline or used car prices, and in addition to implying shrinking corporate profit margins could also suggest the current inflation wave won’t pass as quickly as Powell and co might have wished.

“Many people believe – and we would agree – that the Fed would be happy to let the economy run hot, in terms of higher-than-average GDP growth and lower than average unemployment rates, as long as inflation doesn’t become entrenched,” says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Below is a snapshot of hourly earnings growth and other major indicators, all of which continue to soar well above the Fed’s average annual 2% inflation target:

Finally, the jobless gap increased among racial and ethnic lines.

The unemployment rate among Black Americans held firm at 7.9%, while the rate of white joblessness dropped to an even 4%, resulting in a widening of the Black/white jobs disparity.

Wall Street liked the report, which helped put the major indexes on course for yet another round of record closing highs.

What’s more, compared with last Friday’s closing levels, all three are on track to notch their fifth straight weekly advances.

(Stephen Culp)