November Jobs Report Has Some Nagging Issues for the Fed

Dec 07, 2018
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The November Employment Report missed on the headline jobs growth number (155,000 vs. 197,000 expected), while the unemployment rate remained at 3.7% for the third straight month and matching the Fed’s year-end forecast. The underemployment rate, however, rose from 7.4% to 7.6% as part-time and marginally attached workers increased during the month. Average hourly earnings  increased 0.2% missing the 0.3% expectation (and October was downwardly revised from 0.2% to 0.1%).  The YoY rate remained at 3.1% for the second straight month, matching forecasts, and remains the highest YoY rate in nine years. The average hourly work week, however, fell back to 34.4 hours from 34.5 hours.   In summary, this is a decent jobs report that will keep the Fed on course for a December 19th rate hike. However, the miss on monthly wages and October downward revision, the drop in work week hours, and the increase in the underemployment rate are items that will bear further monitoring in early 2019 before a March rate hike decision. After the release, odds of a March rate hike have fallen from 31% to 26%. 

 

  Economic News

 

The most important metric in recent monthly jobs report have been the wage gain numbers and this month is no different. For November, wages missed the monthly expectation but met the year-over-year pre-release forecast. Average hourly earnings rose 0.2% month-over-month (October was revised down from 0.2% to 0.1%), while year-over-year earnings remained at 3.1% for the second straight month. That print remains the highest YoY number since April 2009.   The miss on the monthly wage gain, and downward revision to October, won’t prevent the Fed from hiking December 19th but the miss combined with the downward revision and the decline in work week hours from 34.5 to 34.4 will have the members focused on the next three employment reports to gauge the trend in wages and hours worked before the March FOMC meeting and the first possible rate hike in 2019.

 

For the month of November, 155,000 jobs were created missing the 198,000 jobs expected and below the 237,000 jobs created in October (downwardly revised from 250,000).  Over the past year monthly job gains have averaged 210,000 so November’s results were moderately under the average. Private payrolls increased 161,000 versus 198,000 expected and 251,000 in October.  Two-month revisions subtracted 12,000 jobs from prior reports. Digging into the categories, 132,000 service-providing jobs were added during the month (82% of total job growth) versus 198,000 in October. Gains were led by health-care and social assistance (+40k) and professional and business services added 32k. Transportation and warehousing was the other sector posting solid gains at +25k.  Meanwhile, only 29,000 goods-producing jobs were added (18% of the total), which is down from the 53,000 added in October with manufacturing (+26k) leading the gains in that sector.

 

The unemployment rate remained at 3.7%  for the third straight month matching pre-release expectations (although unrounded it fell to 3.671% vs. 3.735% in October) . The 3.7% rate remains the low print for this cycle and matches the Fed’s year-end forecast.  The labor force increased 133,000  combined with a decrease of 100,000 in the ranks of the unemployed led to the unemployment rate moving down 1/2% for the month but rounded remained unchanged. 

 

The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) rose from 7.4% to 7.6% and missed the pre-release 7.4% expectation.   The rate rose due to an increase of 181,000 part-time workers  and an increase of 187,000 in the ranks of the marginally attached (those willing to work but not actively looking). Partially offsetting those numerator increases was the aforementioned 133,000 increase in the labor force denominator. This rate bottomed in the 7.9% - 8.2% range prior to the recession; thus, despite the back-up in November we remain at or near full employment. The increased rate, however, will be watched over the next three reports to see if a new trend is being established or if this is merely a one-off blip.

 

The labor force participation rate (labor force divided by civilian population) remained at 62.9%  as the 133,000 increase in the labor force was slightly less than the 194,000 gain in the civilian population which kept the participation rate unchanged.  Despite the continued gains in headline job growth, the current participation rate pales in comparison to the 66% level that prevailed pre-crisis but the 62.7% to 63.0% participation rate range may well be the new full employment normal given the low unemployment rates, aging of the working population and slowing overall population gains.

 

In summary, this is a decent jobs report that will keep the Fed on course for another rate hike on December 19th. However, the miss on monthly wages, the downward  October revision, the drop in work week hours, and the increase in the underemployment rate are items that will bear further monitoring in early 2019 before the March rate decision. Thus, this report has some nagging issues that may be just one-offs but if they, instead, begin a softening trend in wages, work week hours and underemployment a March rate hike becomes increasingly more uncertain, especially with trade war angst rampant, and other geopolitical clouds gathering in the form of Brexit fallout, and Italian budget drama to name just a few.

 

 

 

Market Update  Year-over-Year Change in Avg. Hourly Earnings

Average hourly earnings has become the most important metric in the monthly employment reports. With the unemployment rate remaining at cycle lows, and well below the Fed’s long-run equilibrium rate of 4.5%, wage gains rose 0.2% in November missing the 0.3% expectations and the October print. The November YoY print remains in the 3.0%-3.5% pre-crisis range but still below the 50-year average of 4.2%. The back-to-back 3.1% YoY prints, however, will keep the Fed on track for the rate hike later this month, but the monthly dip in wages and hours worked  will be watched in future reports before a March rate decision is decided. 

 

Year-over-Year Change in Avg. Hourly Earnings

 

 

Agency Indications  Market Rates

 

Market Rates

 

 

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