Case Closed: The November Jobs Report Sets Up the Next Rate Hike
Published: Friday, December 2, 2016 | Author:
Josh Wright, Chief Economist
While some the details were surprising – the large drop in the unemployment rate, the soft wage figures – the message of the November employment report was a reassuring one: job growth remains strong and the Fed can proceed with another rate hike, as expected. There were some signs of softness in the details, but nothing serious enough to change the outlook for monetary policy
The headline figure of 178,000 net jobs created in November was just above the 3-month average of 176,000. Net revisions to the prior two months were only 2,000, but that obscures the fact that September had a substantial upward revision and October a substantial downward one. The latter may reflect the influence of Hurricane Matthew, which had a significant impact on the East Coast that month.
One sign of softness in the November report was the diffusion index, which measures the breadth of job gains. This measure declined somewhat, but at 55.5 (versus a prior-month 59.2), it remains at a healthy level. At the industry level, some familiar themes were present, such as weakness in manufacturing (-4,000 versus -5,000 prior) and strength in construction (19,000, versus 14,000). In the service-providing sectors, net growth was concentrated primarily in professional & business services (63,000 versus 48,000), education & health services (44,000 as in October), leisure & hospitality (29,000 versus 15,000), and government (22,000 versus 7,000). The biggest surprise was probably the continued outright declines in retail trade (-8,300 versus -8,900), especially in light of recent strong retail sales figures, the holiday season, and Hurricane Matthew.
Compared to the establishment survey, the household survey was more uniformly upbeat. The unemployment rate declined by its second-largest margin of the last 2.5 years, to its lowest level since August 2007. While this was in part due to a decline in the level of labor force participation, the total number of unemployed declined by significantly more, so this still counts as a “good” decline in the unemployment rate, even if it is a bit overstated. Moreover, this means the U.S. is now at or beyond what many economists consider to be full employment.
In another encouraging sign, several important measures of labor market slack improved as well. Long-term unemployment declined sharply, as did the number of people forced to settle for part-time jobs. This reflects the fact that job growth has outpaced population growth for some time now. These developments should help the Fed feel that it has its bearings as it heads into its next rate hike, as well as raise the urgency around getting ahead of potential inflation.
The glaring outlier was a surprising softness in wage figures – average hourly earnings declined outright, bringing down the 12-month growth rate to 2.5% from 2.8%. This was a disappointment after last month’s strong figures, but in part may be a correction for them. The Fed is likely to dismiss this as monthly volatility and focus on the inflation outlook and the cumulative progress among other labor indicators. Too many other factors have lined up in favor of a hike.
For once, more or less everything is falling into place for the Fed ahead of a policy move, instead of all falling apart. Coming into this report, the burden of proof was definitely on those at the Fed who would like to delay hiking, and this report didn’t hold much for them. Markets are about as sure of a December hike as they are about anything. According to the CME, they imply about a 95% probability of a hike, just slightly higher than before the release.