Employers added 166,000 employees in October, more than double analyst forecasts, the U.S. Labor Department reported Friday.

Most economists had only expected an increase of between 80,000 and 85,000 jobs. The report helped to ease concerns that the meltdown in mortgage markets and the heavy toll taken on homebuilding would spread to the broader labor market. It will also give the Federal Reserve a break from rate cuts in the face of growing inflationary pressures.

“The labor market continues to be inconsistent with fears of a recession,” said Dean Maki, chief U.S. economist at Barclays Capital and a former senior economist at the Fed, told Bloomberg News. “This report will increase the Fed’s conviction that it should keep rates unchanged in coming months.”

Service industries, which include banks, insurance companies, restaurants and retailers, experienced the largest workforce expansion. They added 190,000 workers in October, after taking on 127,000 new employees in September. Government payrolls grew by 36,000 during the month, after rising 23,000 in September.

Factory payrolls took the biggest hit, dropping 21,000 after decreasing by 17,000 in September.  The construction and lending sectors lost 5,000 jobs each, while finance, a sector that has been hit hard by the credit crisis, saw 2,000 payroll additions last month.  The unemployment rate held steady at 4.7%.

On Wednesday, the Commerce Department reported a surprising 3.9% GDP growth rate for the third quarter, outperforming analysts’ estimates by a large margin.  The employment report is further evidence that the U.S. economy is holding the line, despite the collapse of the housing market and credit crisis.

Every Silver Lining Has a Dark Cloud

While the report is overwhelmingly positive, some economists question the validity of the gains in the latest report, which will be subject to further revision.

“People got too excited about the job loss in August and they’re getting too excited about this gain,” John Silvia, chief economist at Wachovia, said in a recent CNNMoney report. 

It’s clear that Silvia and many other analysts expect much of this optimistic reading will soon be revised away, the same way that the 4,000 job loss originally reported in August has been revised twice, and is now regarded as a 93,000-job gain.

“It’s dealing with the month-to-month volatility in the sampling process,” Silvia said. “Clearly the 166,000 overstates growth. When the final numbers finally come in, it will probably be closer to the 80,000 gain everyone was expecting.”

Certain specificities within the report also came under scrutiny.

“The one warning sign in the report was a drop in trucking jobs,” said Joel Naroff, President and Chief Economist of Naroff Economics. “If we are not shipping goods across the country, there may be more weakness than meets the eye.”

Both Naroff and Silvia questioned the spike in public education hirings, which reportedly totaled 35,000.  The figure is likely the result of the Bureau of Labor Statistics catching up with seasonal gains from the start of the school year.

Regardless of certain inconsistencies the report still stands as a positive signal concerning recession and the U.S. economy. At least, that’s how the Fed will see it…

Fed Implications

The positive nature of the report suggests the economy, at the very least, isn’t falling apart. That means the Fed, which faced a backlash of criticism after slashing rates Wednesday, will be able to abstain from further rate cuts in the near future.

Fed policy makers cut the interest-rate target for loans between banks by a quarter percentage point to 4.5% on October 31.  This followed a half point rate cut at the end of September. 

The Federal Open Market Committee (FOMC) said in a statement that the cuts were meant to “help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.”

However. many analysts second-guessed the decision, suggesting the move would have an adverse effect on the value of a dollar and, in conjunction with high oil prices, fuel inflation. 

Core prices, which exclude food and energy costs, rose at a rate of 1.8% in the third quarter, a 0.4% increase from the second quarter.  That may still be in the Fed’s comfort zone between 1% and 2%, but whether it will remain there remains to be seen.

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Declining domestic auto sales may lead to Chrysler LLC, the third-largest U.S. automaker, to cut 1,500 salaried and contract jobs, Bloomberg News reported yesterday (Tuesday), citing unnamed sources close to the company’s strategy.

These cuts are in addition to the 13,000 projected job cuts the newly private Chrysler already announced it would make in the next three years to reach profitability. As many as 415 of the cuts may be non-union, white-collar workers at the Auburn Hills, Mich., headquarters, the sources said. 

News of the cuts came while the United Auto Workers and Chrysler sat at the bargaining table. If they can’t iron out a resolution by 11 a.m. today, the assembly lines could stop and its operators will strike. The UAW and General Motors Corp. (GM) were able to avert a prolonged strike.

Only this time, the situation is a little different. With white-collar jobs also on the chopping block, both sides have more to lose.

“Feels like a strike is coming,” Lincoln Merrihew, auto industry analyst at TNS Automotive, said to MarketWatch. “The challenge may be all the new faces at Chrysler — they’re smart, but [they] have less experience with the UAW than does GM.”

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From Staff Reports

The Labor Department will release its September jobs report early today (Friday), the first such reading since the now-infamous "shocker "August payrolls report that stunned investors, sparked a stock-market sell-off and essentially forced the central bank to slash short-term interest rates.

The August jobs report, released Sept. 9, showed that the U.S. economy lost 4,000 jobs – the first decline in four years – and didn’t post the gain of 100,000 jobs that economists and investors had anticipated. It was a big miss. And that usually elicits a big reaction. This time was no exception: Investors sent stock prices straight down: The Dow Jones Industrial Average plunged 249.97 points, or 1.87 %, to close at 13,113.38.

Nine days later, with talk of a looming potential recession making the rounds, the U.S Federal Reserve surprised investors again, this time in a positive way, by cutting short-term interest rates by a bigger-than-expected half a percentage point. Stock prices have soared in approval: Early this week they set an all-time high with the Dow closing above the 14,000 level.

What are economists expecting now?

While economists and investors will be watching Friday’s report closely to see what it means for future Fed action, there will also an interest that transgresses interest rates. Stuart Hoffman, chief economist with PNC Financial Services Group, told CNN.com that that if the September jobs report is again much weaker than expected – especially if there’s another decline in the payroll ranks – it will be very bad news for the economy.

"I think the chance of a recession is less than a third," Hoffman told the news service. "If we see another drop in employment, especially in the private sector, I’d be surprised if not shocked, and very nervous. I might put the chance of a recession at 50-50. We might be hanging by our fingernails in that case."

Economists surveyed by Briefing.com are forecasting a 100,000 gain in payrolls in September – or roughly the projection that was made for the last jobs report that proved to be so far off the mark. Even if there is a payroll gain of that magnitude, the U.S. unemployment rate is expected to climb from 4.6% for August to 4.7% for September.

[It's also possible that the August payroll losses of 4,000 will be revised into positive territory, since August is one of the months that can elicit some of the largest revisions of initial readings, economists say].

Stocks have been directionless since Monday’s huge rally, which left the Dow sitting at a record high of 14,087.55. That advance followed several weeks of upward trading after the first central bank rate cut in four years. Investors didn’t want to place big bets ahead of today’s employment report.

Yesterday (Thursday), the Dow Jones Industrial Average rose 6.26 points, or 0.04%, to close at 13,974.31. The tech-laden Nasdaq Composite Index rose 4.14 points, or 0.15%, to close at 2,733.57. The Standard & Poor’s 500 Index rose 3.25 points, or 0.21%, to close at 1,542.84.
"It’s [been] a complete wait … to see what the employment numbers are," Todd Clark, director of stock trading at Nollenberger Capital Partners Inc. in San Francisco, told CNN.com.

Ideally, investors and economists are looking for "Goldilocks" results – those that are "just right."

A stronger-than-expected jobs report might upset investors, boosting the belief that there isn’t much room to cut interest rates anymore.

A report that is much weaker than anticipated would cause a big jump in concerns that a recession is a real cause of concern – even with rate cuts.
The best outcome: A jobs report that was slightly weaker than consensus forecasts would be the best for share prices, as it would increase the likelihood that the economy is strong enough to keep out of a recession – but that continued Fed rate cuts are probably needed to make sure that scenario comes true.

Said Nollenberger Capital Partner’s Clark: "This is going to have to be a just right, ‘Goldilocks’ number."

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