Lingering labor market strength

Bottom Line 

Nonfarm payrolls enjoyed a stronger-than-expected gain in November (with a sizable upward revision in October), and wage growth doubled forecasts. Under the circumstances, Federal Reserve Chair Jerome Powell probably is regretting the inflation victory lap he took at Wednesday's appearance at the Brookings Institution, as the Fed must stay vigilant in its existential battle against inflation. 

Much of today’s jobs report was actually weak. The household survey lost jobs for the second consecutive month, the participation rate declined for the third consecutive month and hours worked decreased for the first time in six months. The news out of the industry sectors was particularly dismal, as temporary help and retail both shed jobs in each of the past four and three months, respectively. 

The S&P 500 has rallied by more than 17% over the past seven weeks, and benchmark 10-year Treasury yields have plunged from 4.33% to 3.50% over the past six. This strength was due in part to expectations inflation is trending lower and the Fed is approaching a policy pivot, potentially swapping rate hikes for rate cuts. Today’s data throws cold water on that view, and we expect stocks and bonds to sell off. 

Fed downshifts After four consecutive 75 basis-point rate hikes, we expect a half-point increase at its Dec. 14 policy-setting meeting, followed by two quarter-point rate hikes in the first quarter. Our best guess remains that the Fed will arrive at a terminal fed funds rate of 5% by the end of the first quarter. 

Challenger, ADP, JOLTS & claims all point to a sharp labor slowdown: 

• Challenger job cuts surged in November to a 2-year high, up by 417% from a year ago and by 127% month-over-month (m/m), with technology layoffs accounting for most of the terminations. The tech bloodbath is the highest since record-keeping began in 2000.
• ADP private payroll survey for November added a much weaker-than-expected 127,000 jobs, a 2-year low, down 47% m/m from October and down 75% from a year ago. Wage growth soared 7.6% year-over-year (y/y) last month for job stayers and by 15.1% for those who changed jobs. 
• The Job Openings & Labor Turnover Survey (JOLTS) declined 3.3% m/m in October to 10.334 million job openings, down 13% from a record 11.86 million job openings in March 2022. There are now 1.7 job openings for every unemployed worker in October, down from 1.9 in September. Voluntary quitters declined to 4.026 million, and their rate eased to 2.6%. 
• Initial weekly jobless claims have eased 14% over the past four months to 225,000 last week after rising by 57% over the four months from mid-March (166,000 claims) to mid-July (261,000). But the Thanksgiving holiday may have skewed weekly claims. In contrast, continuing claims have risen 23% over the past six months to 1.61 million in mid-November.

Robust job gains November nonfarm payrolls handedly beat expectations, rising by 263,000—higher than Bloomberg’s consensus gain of 200,000 and our own more conservative estimate of 147,000 here at Federated Hermes. October was revised up by 23,000 jobs to a gain of 284,000, although September was revised down by 46,000 jobs to a final gain of 269,000. We believe the underlying health of the labor market is weaker than the headline implies. 

Wages soar, hours worked decline Average hourly earnings rose 5.1% y/y in November from 4.9% in October. But wages ticked up for the third consecutive month by 0.6% m/m in November, twice as fast as the consensus had expected. That pace, which annualizes to a worrisome 7.2%, is enough to keep the Fed on the inflation warpath. But when we overlay the new rail workers labor agreement, which calls for an outsized 24% wage increase over five years, the Fed might fear every labor union in America will demand comparable treatment. In addition, average hours worked slipped a tick for the first time in six months to 34.4. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. 

Unemployment flat, labor impairment and participation rates fall The household survey lost 138,000 jobs in November for the second consecutive month and for the fourth time in the last eight months. The number of unemployed people fell by 48,000 in November, declining for the fourth time in the last six months. The unemployment rate (U-3) held steady at 3.7% in November, up from 3.5% in September, which had matched its pre-pandemic, half-century low in February 2020. The labor impairment rate (U-6) ticked down to 6.7% in November, matching its record low (dating back to 1994) set in September, June, and July. But the civilian labor force declined by 186,000 workers in November, its fifth decline in the last six months. That drove the participation rate down for the third consecutive month to 62.1% in November, compared to the pre-pandemic cycle high of 63.4% in February 2020. 

K-shaped recovery improves High-wage-earning workers saw their unemployment rate rise a tick to 2% in November from September’s cycle low of 1.8%. But the rate of low-wage-earning workers plummeted to 4.4% in November from 6.3% in October, approaching its 30-year low of 4.3% in February 2022. The personal savings rate fell to a new 17-year low of 2.3% in October (down sharply from 26.3% in March 2021), so it seems the latter are returning to the labor market as their savings dwindle. 

Sector details weak The manufacturing sector added a weaker-than-expected 14,000 jobs in November, which is less than half of October’s gain of 36,000. The ISM manufacturing index fell under 50 for the first time this cycle to 49 in November, and all six of the Fed’s regional manufacturing indexes have fallen to 2-year lows. Construction has been choppy, adding 20,000 jobs in November versus only 9,000 in October, 23,000 in September and 9,000 in August. Mortgage rates have more than doubled from 3% to 7% over the past 11 months, slowing the housing market significantly. 

Holiday retail hiring has been weak, shedding 30,000 jobs in November, 3,000 in October, and 30,000 jobs in September. In sharp contrast, Back-to-School retail hiring was robust, adding 29,000 jobs in August, 16,000 jobs in July and 22,000 in June. Temporary hiring, a leading indicator of employment trends, has lost jobs in each of the past four months, losing 17,000 jobs in November, 6,000 in October and 23,000 in September and 1,000 in August. 

Leisure & hospitality, however, has strengthened considerably over the past three months, adding 88,000 jobs in November, 60,000 in October and 111,000 new jobs in September, much better than August’s muted gain of only 13,000 jobs. However, this growth pales by comparison to the monthly hiring pace of about 189,000 last November and December. The improvement has positively impacted low-wage workers, whose unemployment rate plunged 2 percentage points last month. 

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