• US non-farm payroll employment rose 199k in November

• Revisions to the two prior months were negative, subtracting 35k from the previously reported figures

• Unemployment rate ticks lower to 3.7%

• Average hourly earnings increased by 0.4% MoM, 4.0% YoY

• Labor force participation ticked slightly higher to 62.8%

• Decline in unemployment rate underscore labor market resilience

The return of striking workers helped boost the number of new jobs created in November by 199,000 and wages rose sharply, but the latest job report also pointed to some softening in the labor market as high interest rates take a toll on the US economy. The change in total nonfarm payroll employment for September was revised down by 35,000, from 297,000 to 262,000, and the change for October remained at 150,000. With these revisions, employment in September and October combined is 35,000 lower than previously reported.

The job numbers were boosted by sizeable gains in government hiring as well as workers returning from strikes in the auto and entertainment industries. However, the employment report was somewhat softer if the return of up to 50,000 striking Hollywood and auto-industry employees is set aside. Most of the new jobs were also concentrated in healthcare and government. Other major industries either did little hiring or cut jobs. Service sector (+121k) gains largely concentrated in healthcare & social assistance (+93.2k) and leisure & hospitality (+40k). Meanwhile, retail trade (- 38.4k), professional & business services (-9k) and transportation & warehousing (- 5k) all shed jobs last month. Goods-producing industries (+29k) were lifted by a strong gain in manufacturing (+28k), although this was entirely due to the resolution of the auto worker strike. The public sector had another solid month of hiring, adding 49k jobs.

The unemployment rate ticked down to 3.7%. The participation rate returned to its cyclical high of 62.8%. Average hourly earnings were up 0.4% MoM while the twelvemonth change held steady at 4.0%.

The household survey's measure of employment has shown a stronger, albeit bumpier, pace of employment growth. In November, household employment expanded 747k. The robust job gain outpaced the 532k increase in the labor force, leading the unemployment rate to fall 0.2 percentage points to 3.7%. The decline in the already historically low unemployment rate suggests that while the labor market is cooling, it remains exceptionally tight. The labor force participation rate rose to 62.8% from 62.7% in the prior month. Fewer people were experiencing long bouts of unemployment in November, with the number declining by 132,000 to 1.15mn. The number of people working part-time for economic reasons decreased 295,000 to 3.99mn. The employment-to-population ratio, viewed as a measure of an economy's ability to create employment, increased to 60.5% from 60.2% in the prior month. A more encompassing jobless rate that includes discouraged workers and those holding part-time positions for economic reasons drop to 7.0%, a decrease of 0.2 percentage point.

Average hourly earnings, a key inflation indicator, increased 0.4% MoM after gaining 0.2% in October. That kept the annual increase in wages at 4.0% in November. Still, wages are rising too fast to lower inflation to its 2% target.

Decline in unemployment rate underscore labor market resilience

Job growth rebounded in November with the economy added 199k jobs in November, largely in line with its pre-pandemic average and up from 150k the previous month, in part due to the resolution of the auto worker strike, which helped to add back around 30k workers to November’s payrolls. The unemployment rate dipped to 3.7% as the labor force participation rate edged higher. Annual wage growth held constant at 4.0%, down from the highs seen last year, but still above what’s consistent with 2% inflation.

When looking through the strike-related volatility, employment growth has continued to gradually decelerate. Payrolls expanded at a 204K average over the past three months, which is around 100K less than the comparable average that prevailed a year ago. Softening labor demand has underpinned the moderation in payroll growth.

The signal from the more recent November payrolls report was generally in line with the JOLTS data. JOLTS data showed that the number of job openings in October fell and slipped to the lowest level since March 2021. Although still higher than before the pandemic, at 8.7mn, openings are down notably from a record high of 12mn in March 2022. To be sure, there were still plenty of jobs available relative to the more than 6.5mn unemployed job seekers in October. However, the gap has narrowed with the vacancies-to-unemployed ratio falling to 1.34 from 1.47 in September — its lowest reading since August 2021. Further evidence of labor demand cooling has been seen in continuing jobless claims, which have ticked higher over the past month, suggesting workers are finding it a bit harder to find a new job.

The drop in the jobless rate to 3.7% from a nearly two-year high of 3.9% in October alleviated fears that the economy was close to tipping into recession although the resilient labor market that supported an unexpectedly strong US economy this year is showing signs of cooling, but not collapsing job market and is therefore consistent with the soft-landing narrative. The latest signs that it is coming back into greater balance will be welcomed at the Fed, which will be meeting next week for their final policy decision of the year. When Fed Chair Powell noted that the central bank can “let the data reveal the appropriate path”, this week’s data points to a steady course. All eyes will be on next week’s CPI release to see if it corroborates that plan of action. The CPI report for November will be released on 12 December, which happens to coincide with the first of the two-day monetary policy meeting of the Federal Reserve. Consensus expect a flat headline rate of inflation in November and the forecast is for the annual rate of headline CPI to have inched down to 3.1% from 3.2%. The core CPI, which excludes food and energy, is expected to rise 0.3% MoM, signaling slower progress on underlying inflation.

The US central bank is expected to keep rates unchanged for the third consecutive meeting next week. Having hiked by 525bps since early 2022, the FOMC appears more confident about easing off the gas and cruising at its current 5.25-5.50% target range. If realized, the third consecutive hold would suggest that, rather than the FOMC merely hiking at a slower pace, the fed funds rate probably has reached its terminal level of this cycle. With the Committee seeming to settle into a prolonged hold, the conversation around the future policy path will shift toward when and under what circumstances the FOMC eventually cuts rates. We expect the post-meeting statement will keep the door open to the possibility of additional tightening this cycle. However, while the statement likely will indicate that further tightening remains possible, we would not be surprised for it to hint that another rate hike is less probable.

Term yields have significantly retraced from their mid-October highs as favorable readings on inflation and signs that the labor market is gradually cooling have led market participants to pull-forward the timing of rate cuts. Given the inflation sparks are still glowing and could very easily be reignited by still elevated wage pressures, we believe that the view for earlier rate cuts by the Feds as premature. Policymakers will need to see more compelling evidence that the labor market is on a sustained path towards rebalancing before pushing ahead with any rate cuts. This is unlikely to happen until the second half of next year.

Source: BIMB Securities Research - 11 Dec 2023