Jobs Report Is (Very) Bad News For Fed

The US economy added more jobs than economists anticipated in November and wage growth rose at twice the expected rate, crucial data out Friday showed.

At 263,000, the headline NFP print nearly matched the highest estimate from six-dozen forecasters. Consensus expected 200,000.

With November’s gain (and incorporating the net downward revision from the prior two months), the US added 4.3 million jobs from January through last month.

Private payrolls rose 221,000, easily exceeding estimates. Earlier this week, ADP’s data suggested private payrolls increased just 127,000 last month.

Manufacturing added 14,000 jobs in November, the BLS said. That was less than half October’s gain. ADP’s figures showed a very large decline in factory payrolls, and the employment index in the ISM factory survey slipped into contraction territory for November, according to data released on Thursday. Still, the monthly average in 2022 sits at 34,000, better than that observed for manufacturing in 2021.

Leisure and hospitality hiring was solid, at 88,000 (62,000 in food services and drinking places). A quick scan of the figures suggested hiring was generally broad-based last month, notwithstanding declines in retail and a drop in transportation and warehousing.

All of that’s encouraging for the economy, but it’s difficult to escape the notion that November’s jobs report was bad news for the Fed, and thereby for overzealous market participants keen to front-run an eventual policy pivot.

Average hourly earnings rose 0.6% from October, double consensus. At 5.1%, the 12-month rate was far higher than expected (4.6%) and inconsistent with the Fed’s inflation-fighting goals. “Bulls need wage growth to decline sharply without big job losses,” BofA’s Michael Hartnett said, on the eve of November payrolls, noting that early bulls probably need the monthly AHE prints to be 0.2% or less. Friday’s data didn’t cooperate on that front.

The unemployment rate held steady at 3.7%, in line with consensus. Unfortunately, the participation rate moved lower to 62.1% (figure below).

That’s very bad news for the Fed, and underscored Jerome Powell’s remarks on Wednesday, when he told listeners at a Brookings event that the gap in labor market participation seemed unlikely to close expeditiously.

The household survey showed another decline. November’s 138,000 drop came on the heels of a 328,000 decline the prior month (figure below).

Although I’ve been keen to note that history shows no obvious relationship between negative household prints and subsequent revisions to the headline NFP figures, two months in a row is notable.

The bottom line, though, was simple enough: November’s job report wasn’t consistent with the Fed’s goals. The headline was considerably stronger than expected, participation was lackluster (again) and wage growth was very hot.

“Most problematic from the Fed’s perspective was the decline in the participation rate — lower labor force participation is clearly driving up wages and implies the Fed will need to do more,” BMO’s Ian Lyngen said. “This is a report that solidifies 50bps from the FOMC in less than two weeks, with the wage data and unanticipated drop in participation reinforcing the case for a longer period in restrictive territory in 2023 (and possibly beyond),” Lyngen added.

“Strong job creation and a big increase in wages underscore the Fed’s argument that a lot more work needs to be done to get inflation under control,” ING’s James Knightley remarked. “Today’s jobs number confirms we remain a long way off from demand balancing with supply, which would ease labor market-related inflation pressures.”

I’d be very surprised if the market trades November payrolls bullishly. This should prompt an increase in market-implied terminal rate expectations (albeit probably only incremental), may put the brakes on any nascent curve steepener and could weigh on the two-month rally in equities. All eyes turn to CPI.


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One thought on “Jobs Report Is (Very) Bad News For Fed

  1. While there was obvious focus on headline NFP of 263k and the AHE, on balance there is still some signs within the report that show reasons to believe in the labour market slowdown is far more advanced that 263k or indeed, the recent 3m and 6m averages of those numbers. Most analysts ignore the HH survey numbers because they are so volatile. However, they are more useful if you smooth them out. For example ahead of the 2007 recession, there was a discrepancy of weak HH vs Establishment jobs numbers, this is happening again, since March there are hardly any jobs created in HH survey. One theory is that the NFP uses the birth/death adjustment. Over a mult-year period this is entirely sensible, but it may not be sensible at turns in the labour market to assume that the number a new firms creating new jobs is related to old firms closing up and letting go of workers. Another thing to take note of is hours worked declined and so did Temp workers, both are considered leading indicators for NFP. Finally on wages–the surge–it might be worth digging into this to see if there are distribution issues impacting the headline. For example if a lot of those at the lower end dropped out, it would push of the average. To be clear, I do not know if this happened, but it deserves a closer look. On balance , I see the NFP as more neutral or even a little more concerning for the outlook than most, altough, I am not in the recession camp at all. But this does add weight to pressing down on seasonal, justifying it by saying peak hawkishness has come and gone—think Nov 1994–where terminal rate discounted peaked at 6.5% but the Fed did hike one more time in Feb 1995 to 6.0%.

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