Friday, December 2, 2022
The economy added 263,000 jobs in November, a decrease from October’s upwardly revised 284,000 but a large upside surprise from the pre-release consensus estimate of 200,000, highlighting the continued resilience of labor markets even as job growth continues to slow. Adding to the picture of a still robust job market, hourly earnings came in at +0.6% versus a consensus estimate of 0.3%, with on a 0.1% upward revision to October’s number as well.
The immediate reaction from markets was that good news is bad news, as a strong job market keeps an aggressive Federal Reserve (Fed) in play as it continues to fight inflation. Adding to the picture of a still tight labor market, the participation rate declined from 62.3% to 62.1%, helping to keep the unemployment rate at 3.7%.
Following the release of the report, the 10-year Treasury yield climbed, reversing some of yesterday’s sharp decline following Fed Chair Jerome Powell’s speech at the Brookings Institute, and S&P 500 futures fell over 1%. We caution that it can take time for markets to fully digest economic data, but the market direction is in line with what we would expect.
As shown in the LPL Chart of the Day, the three-month average of job gains has been generally slowing throughout 2022. Nevertheless, the current three-month average of 272,000 jobs added per month is still above 95% of the values from 2000–2019.
Although October job gains were upwardly revised, the September number was downwardly revised by an even larger amount, giving us a two-month net revision of -23,000. While the more recent revision does mean more momentum recently, it does slightly soften the overall picture.
Average hourly earnings climbed to 5.2% year over year. The latest reading on core personal consumption expenditure (PCE) inflation yesterday was 5.0% year over year, although that number was for October. Nevertheless, having wages start to catch up with inflation may help sustain consumer strength. Wage growth may be bad news for markets as it puts upward pressure on inflation and keeps a more aggressive Fed in play, but it’s good news for consumers.
Finally, a low participation rate continues to keep the job market tight. When the pandemic first hit the U.S. economy saw a large number of participants leave the workforce. The number of people entering the labor force has increased in the last four months and continues to bringing the economy back to pre-pandemic trends. The latest participation rates are approaching but still below pre-pandemic rates, suggesting that the labor market could loosen as more re-enter the workforce. We think the high inflationary environment will eventually bring those people back into the workforce who had taken a “gap year” during the pandemic.
Ultimately, this is not the job report the market wanted to see, with its combination of an upside surprise on job gains, an upside surprise on wage growth, and a weakening participation rate. It is only one report, but the market is clearly recalibrating expectations. The final Federal Reserve meeting of the year takes place on December 14–15. The meeting starts the day after the last Consumer Price Index (CPI) inflation report of the year on December 13, which will give markets a final opportunity to update Fed expectations prior to the meeting.
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