Jobs Report Misses Big, But Unemployment Rate Drops Sharply

The US economy added just 210,000 jobs last month, the government said Friday.

The headline NFP print was the lowest of 2021 and represented a large downside miss. Consensus expected 550,000 (figure below).

The range, from more than six-dozen economists surveyed, was 375,000 to 800,000. November’s headline thus missed the lowest estimate by a mile.

Revisions were positive, though. September was revised up by 67,000 and October by 15,000, adding a combined 82,000 “extra” jobs to the previous two months’ reports.

Private payrolls rose 235,000, nowhere near the 536,000 consensus. Manufacturing added 31,000 positions, well below the expected 45,000.

Perhaps most notably, leisure and hospitality hiring was virtually unchanged in November. The industry added a mere 23,000 jobs, leaving employment in the sector still 8% below pre-pandemic levels. The US shed 20,000 retail jobs last month, mostly in clothing stores. That certainly raises questions about whether the economy is in for a repeat of last year, when the winter COVID wave dampened hiring.

The participation rate rose, though. 61.8% was two ticks higher from October and the unemployment rate fell to 4.2%, the lowest since February 2020 and well below the 4.5% economists expected (figure below). Not a single forecaster out of 73 surveyed by Bloomberg predicted the unemployment rate would be below 4.3%.

The drop in the unemployment rate and the rise in participation will be welcomed by the Fed.

Earlier this month, Goldman said participation “is likely to remain below the pre-pandemic demographic trend, with most of the early retirees — who account for almost 40% of the remaining gap — staying out, and even some of the younger and middle-aged workers staying out too.” The bank’s Jan Hatzius sees the participation rate eventually rising to 62.1%, still a half percentage point below the pre-pandemic trend.

The latest read on the labor market comes at a critical juncture, not just for monetary policy, but for fiscal policy and, by extension, for the Biden White House.

Fed officials, including Jerome Powell, have acknowledged the obvious: The inflation side of their mandate is met. And then some. The only ostensible hurdle to policy tightening is the labor market, which remains a conundrum. While millions who were working prior to the pandemic remain on the sidelines, “slack” may be a misnomer.

As of September, there were 1.4 job openings for every US job seeker (figure below).

The quits rate is at a record high and the media is alive with headlines about “The Great Resignation.” 4.4 million people quit in September alone.

Private sector compensation rose at a record pace in the third quarter, and competition for scarce labor is forcing employers to pay up to retain workers.

The worry is that the US economy is teetering precariously on the brink of a wage-price spiral. Fed officials have been keen to play down that notion, but surveys of consumer sentiment and inflation expectations show Americans are acutely aware that price pressures are broadening out. That awareness will surely translate to demands for higher wages. Data from October showed retail sales and personal spending were robust despite rising prices.

All of that suggests good news may be bad news for inflated financial assets to the extent additional robust labor market data compels the Fed to accelerate plans to tighten policy.

Seen in that light, the November jobs report could be viewed as constructive for markets. Note that wage growth was cooler than anticipated. Average hourly earnings rose 0.3% MoM and 4.8% YoY against expectations for a 0.4% monthly gain and a 5% YoY rise.

Of course, the emergence of the Omicron variant introduces a new layer of ambiguity. In prepared remarks to Congress this week, Powell said another COVID wave could delay a return to full employment. The market took that as dovish. The very next day, though, Powell pivoted hawkish when, after delivering his remarks, he told lawmakers it was time to “retire” the transitory characterization of inflation.

“Unlike in recent months, NFP is less likely to define the near-term path for US rates given Powell’s recent hawkish pivot,” BMO’s Ian Lyngen and Ben Jeffery said Friday morning, adding that even if the jobs report disappointed, “there have been enough payrolls added since July that the Fed has a buffer of positive momentum in the labor market as cover to accelerate QE tapering in the event policymakers are compelled to do so.”