Job Numbers Show the Economy Can Take a Punch

Housing and credit problems have slowed, but not stopped, the economic expansion.

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Mortgage meltdown. Credit crisis. Yet the U.S. economy keeps rolling. I've called it the Rocky Balboa Economy in the past. But then again, the "Italian Stallion" got knocked down from time to time. This boom, while it's taken plenty of hard shots, always manages to stay on its feet.

Today's solid payroll numbers are more evidence of that. Net new jobs for September were up 110,000, while August payrolls were revised upward to a gain of 89,000 from a loss of 4,000 in the Labor Department's preliminary estimate.

Now, to be sure, job growth has slowed. The economy averaged 97,000 monthly new jobs in the third quarter vs. 126,000 in the second quarter, 142,000 in the first quarter, and 189,000 in the fourth quarter of 2006. Moreover, the unemployment has ticked up to a still-low 4.7 percent. Yet as investment firm JPMorgan notes, "At the same time, this is very different from the message that had been sent by the unexpected 4,000 drop in the initial print of August payrolls." It sure is. That August number made the economy and labor market look as if they were in free fall.

Great news on the wage front, too. As economist Michael Darda of MKM Partners notes, nonsupervisory wages—adjusted for inflation—are up 2.3 percent during the past year vs. a 10-year moving average of 1.3 percent and an average rate of 0.4 percent since 1971. Even the left-of-center Center for Economic and Policy Research, a D.C.-based think tank, had to grudgingly concede that the wage picture is solid: "Wage growth remains relatively healthy. The annual rate of wage growth for the last three months was 4.3 percent. This is up slightly from the 4.1 percent rate over the last year. With inflation at slightly under 3.0 percent, this is sufficient to allow a respectable pace of real wage growth, if it can be sustained."

All this makes the Fed's next rate decision a bit trickier. But if a strengthening economy gives Fed Chairman Ben Bernanke a few sleepless nights, so be it. And it really shouldn't. Goldman Sachs just calculated four different versions of the Taylor Rule, a monetary policy rule that takes into account inflation and how far the economy's current growth has veered from its potential growth. The calculations imply that the federal funds rate should be around 3.5 to 4 percent, not the current 4.75 percent. Solid job growth and falling interest rates—not a bad one-two punch.