The U.S. labor market showed surprising strength in November, with 263,000 jobs added in the month. The unemployment rate also held steady at 3.7%. This is higher than expected and reflects that tight labor demand remains in the U.S. economy. The high demand for labor but low supply also caused a surge in wage growth, which was up 0.6% for the month and accelerated back to 5.1% over the last year. This report shows that inflation pressure remains a challenge and the Federal Reserve has more work to do to slow price increases.
Surprising Jobs Report Shows Continued Strength in Labor Market
263,000 Jobs Added in November and Unemployment Stays at 3.7%
Top Takeaways from the Report
November Job Growth Shows Unexpected Strength
In a surprise move, the U.S. labor market added 263,000 jobs in November. This Is nearly as high as the 284,000 jobs added in October and was much higher than the consensus expectation that 200,000 jobs were added in the last month. This report reflects a resilient labor market where employers are still adding jobs even in the face of restrictive economic policies coming from the Federal Reserve.
The unemployment rate remained at a very low rate of 3.7% in November, which is unchanged from October. This is consistent with expectations, but it reflects how tight the labor market remains. The November unemployment rate is only slightly above the low of 3.5% that has dominated for much of the past year. This is especially surprising, given recent announcements of layoffs among many tech, housing, and growth sectors. Companies such as Apple, Amazon, Lyft, and Twitter announced employment reductions totaling more than 75,000 in November. However, there are around 1.7 job openings for every unemployed worker so employers continue to pick up employees as soon as they become available.
In another surprising and unexplainable move, the labor force participation rate contracted again in November, dropping to 62.1%, down from 62.2% in October. The labor force participation rate is the ratio of people working or looking for a job compared to the total working-age population in the country. The strength of the labor market and the strong demand for workers should be bringing more people off the sidelines and back into the labor force, but the opposite is happening. This is partially due to long-term trends of worker retirements but the cyclical strength of the economy should be pulling more people back into the labor force. The participation rate is still far below the pre-pandemic rate of 63.3% in early 2020.
Wage growth, which had been decelerating for the past few months, moved up again in November. On a month-over-month basis, wage growth increased to 0.6% in November. This is higher than the October growth of 0.5% and is much higher than expectations that wage growth would fall to 0.3%. Wage growth was 5.1% higher than one year ago in November, which is also higher than the 4.9% year-over-year growth rate recorded in October. If this trend doesn’t reverse it will lead to fears of a possible wage-price spiral, in which higher wage growth will continue to add to price pressures.
It’s still too soon to say whether inflation has peaked, and the big question is how long it will take to return to the Fed’s goal of 2%. While the Consumer Price Index dropped to 7.7% in October, from 8.2% in September, it still remains much too high. Core inflation, which excludes more volatile food and energy, is also much too high, recording a year-over year increase of 6.3% in October. While much of the inflationary pressure over the last year could be explained by supply chain disruptions, the continued surge in service sector inflation tells a different story. Prices for services were 7.2% higher than a year ago in October. Prices in services are driven almost entirely by wages and the continued strength in service sector inflation is a reflection that wage growth is driving overall inflation higher.
Growth by Industry
All industries except one had positive job growth in November. The private-sector added 221,000 jobs, with the goods-producing industries adding 37,000 jobs and the service-providing industries adding 200,000 jobs.
Nonfarm payroll in leisure and hospitality continued its strong growth in November, adding 88,000 jobs over the previous month. However, the industry is still 980 thousand jobs, or 5.8%, below its pre-pandemic level in February 2020.
Other notable job gains occurred in education and health services (+82,000) and government (+42,000). Trade, transportation, and utilities (-49,000) was the only industry to have negative job growth during November.
The Bottom Line
Much of the discussion among analysts and investors lately has been about the “Fed pivot”. The Federal Reserve has increased the Fed Funds rate by nearly 4% since March in order to slow the economy and bring down inflation. These rate increases have already impacted industries such as housing, real estate, and growth companies.
Recently, Jerome Powell, the Chair of the Federal Reserve, commented that he would like to slow future rate increases, but that the Fed’s strategy is contingent on the labor market. The Fed wants more slack in the labor market in order to reduce labor shortages and soften inflationary pressure on the economy. Unfortunately, the latest jobs report continues to make the Fed’s mandate difficult to achieve. The labor market remains extremely tight, with higher than expected job growth, a very low unemployment rate, and wage growth coming in too high. This will complicate the Fed’s interest rate path and may result in interest rates that remain higher for a longer period of time.
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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economics and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.
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