Instant Analysis: Employment report for November

Scott Anderson
Posted by Scott Anderson
Chief Economist

Another solid jobs report for November along with a big and unexpected drop in the U.S. unemployment rate nearly assures a quarter-point rate hike at the December FOMC meeting on December 14.

Silhouette of a delivery man and truck at sunset with blue sky in the background.Non-farm payroll gains came in about in-line with our expectations: 178K on the month vs. our estimate for 183K and the consensus of 175K.

Lowest jobless rate in 9 years

The U.S. unemployment rate fell to 4.6% from 4.9% in October.  It’s the lowest unemployment rate since August 2007.   The drop in the unemployment rate was aided by two consecutive months of decline in the U.S. labor force.  The labor force has dropped by over 400K people over the last two months —  226K in November and 195K in October.  The labor force participation rate has slumped back to 62.7% in November from 63.0% in March.

The U.S. unemployment rate now appears to be somewhat below the natural rate of unemployment for the United States, which could aggravate labor shortages in some sectors and lead to stronger earnings growth and perhaps higher consumer price inflation.  Some hawks on the FOMC might take away from this that the Fed may be a bit behind the curve now in normalizing short-term interest rates.  They may advocate for an accelerated and more aggressive rate hike path for 2017 and 2018 on fear of an overshoot of the Fed’s intermediate inflation goals.

On the other hand, there is little sign in today’s report that  earnings growth is shooting higher.  Average hourly earnings fell 0.1% in November after a strong 0.4% gain in October.  Average hourly earnings year-on-year fell back to 2.5% from 2.8% in October. Until we see more compelling evidence of rising earnings growth or core inflation, the majority of the FOMC should be comfortable with the gradual rate hike path they have already communicated  in the dot-plot for 2017 and 2018.

Job growth seen in most sectors

Broad-based job growth continued across most sectors. Job growth picked-up in November for construction (19K), business services (63K), leisure and hospitality (29K), and government (22K). Job gains in education and health care were the same as in October (44K). Job growth slowed in financial services (6K), and net job losses were seen in information (-10K), retail (-8K), and manufacturing (-4K).

Early reaction in the financial markets has been muted.  S&P500 futures are indicating down fractionally, the 10-Year Treasury bond yield is 2 basis points lower from yesterday at 2.419%, the U.S. dollar is a bit weaker today, and WTI crude oil futures are flat (consolidating the strong gains seen in recent days).

Bottom line: There is little new data in this November jobs report to change our economic, inflation, or interest rate outlook.  Moderate economic and employment growth continues, and the labor market tightness is becoming more visible and getting difficult to ignore. We still expect a December rate hike from the Fed and two more quarter-point hikes from the FOMC in 2017.

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