The unemployment rate held steady in November
Heading into year-end, the growing concern has been the risk that the Fed’s aggressive tightening wouldn’t only cool inflation but tip the economy into recession. That may still be the result, but labor market resiliency suggests that a contraction isn’t yet at the doorstep.
Job creation surprised to the upside in November, as employers added 263,000 new workers to payrolls last month. Revisions to the September and October tallies were mixed, but on net shaved 8,000 from previously reported figures. Even so, the net 255,000 increase easily topped expectations.
The strength of job creation allowed the unemployment rate to hold steady at 3.7%, still within a stone’s throw of the cyclical low of 3.5% in September. There are signs of slackening in labor conditions, but still nowhere near what the Fed wants to see to rest easy that multidecade highs in inflation are poised to return to the central bank’s 2% target anytime soon.
While there’s no magic threshold for joblessness that definitively signals recession, a sustained move in the unemployment rate to above 4.0% would be a key development. Given the limited increase thus far, it may seem that it could still take some time to reach that, but a more significant loss of momentum — when it eventually arrives — could push the jobless rate meaningfully higher relatively quickly.
For Fed-watchers, the relative strength of the November jobs report doesn’t change much in terms of expectations; another 0.5% rate hike in mid-December was already viewed as locked in, with the possibility that policymakers could tighten by another 0.75% still on the table.
In a certain sense, the difference between the two outcomes is minimal, but the message that the Fed could send by actually backing away from the brisk 0.75% per meeting clip that has defined much of the year would be meaningful to the equity market. In recent months, any indications that the Fed may be starting to ease up have been met with a sense of relief by investors. A more tangible sign that the Fed is actually ready to downshift to a more moderate pace of tightening would be welcomed. Whether the December meeting will bring that remains to be seen.
One area of caution for inflation hawks was the 0.6% monthly gain in average hourly wages. The pace of wage gains has now accelerated for three consecutive months — hardly what the Fed is looking for. The year-on-year increase of 5.1% remains elevated and is particularly concerning in the context of the outlook for service sector inflation.
The good news? There are indications that labor markets are feeling the effects of higher rates and the loss of economic momentum over the past year. The bad news? It’s still not enough to allow the Fed to stabilize its policy rates.
The bottom line? Job creation continues to top expectations, holding the unemployment rate near half-century lows. The Fed may be closing in on a point that the pace of rate hikes could be stepped down, but the combination of tight labor markets and stubbornly elevated inflation leaves policymakers with a clear directive: keep tightening.
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