Jobs pick up but red flags remain

NEW YORK (CNNMoney.com) -- Employers added more than twice as many workers in October as economists had expected, according to a closely-watched government report Friday.

The bullish outlook of a 166,000-job gain comes two months after the same employment measure shook economists and markets by reporting the first job loss in four years.

The strong jobs report helped calm recent fears that the U.S. economy was falling into a recession because of a sharp downturn in home building and housing values, weak demand for autos and spreading problems in credit markets.

But some economists questioned the validity of the gains in the latest report, which is subject to further revision.

"People got too excited about the job loss in August and they're getting too excited about this gain," said John Silvia, chief economist with Wachovia.

Even economists who have a bullish view of the economy said they believe downward revisions in the reading are likely. But they argued that the report showed a fundamental strength in the U.S. economy that has been overlooked by those fixated on housing and credit problems.

"Maybe everything isn't coming up roses, but it's coming up carnations," said Rich Yamarone, director of economic research at Argus Research. "It's not coming up weeds like everyone else seems to be suggesting."

The Labor Department report showed a net gain of 166,000 jobs in the month, up from a revised 96,000 increase in September. Economists surveyed by Briefing.com had forecast an 80,000 increase last month.

The unemployment rate stayed at 4.7 percent. That matched both economists' forecasts as well as the rate posted in September.

Construction lost only 5,000 workers in the October report, because much of the 21,500 decline in residential construction jobs was made up in other sectors of the building industry. Lenders trimmed nearly 5,000 jobs, but the financial sector posted a 2,000 job gain overall.

The service sector was the major driver of job growth, even as retailers showed a 22,000 job decline in the seasonally-adjusted reading. About half of the loss among retailers came in two battered sectors - auto dealerships and building supply stores. But segments considered more typical of retail performance, such as department stores, clothing and electronics retailers, also saw declines.

"Retailers won't hire the seasonal person because they're not certain of the holiday shopping period," said Silvia.

The strong gains came from employers in the government, leisure and hospitality and business and professional services sectors. But Silvia, chief economist with Wachovia, questioned some of the gains being reported there.

For example, the latest report showed about a 35,000 increase in public school employment in October, which Silvia said is probably the result of the report catching up with the normal seasonal gains at the start of the school year. It also showed temporary workers in business services bouncing back to a 20,200 gain, after a drop of almost that same amount in the latest September reading.

He said he expects much of this stronger-than-expected reading will soon be revised away, the same way that the 4,000 job loss originally reported in August has since been revised up twice to a 93,000 gain, which is close to the original estimate for that period.

"It's dealing with the month-to-month volatility in the sampling process," said Silvia. "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."

And he sees many signs of weakness sprinkled throughout the report. Only about a third of the job losses in manufacturing are due to the downturn in the auto sector, as the weakness employment declines are widespread through most of the goods-producing sectors tracked in the report.

"The economy is producing jobs, but it's doing so at a below trend pace," he said. "I would emphasize that the job creation is skewed. It is entirely in the service sector."

The report didn't show much in the way of inflation pressure from the improved labor market outlook. The average hourly wage was up only 0.2 percent, less than the 0.3 percent forecast. And the September wage gain was also revised lower.

Stocks, which had sold-off sharply on Thursday on fears over problems in the nation's financial firms, opened higher on the jobs news but then turned lower.