With the jobs market still sizzling, it looks like the Federal Reserve might have to hand out more ice.
The U.S. economy added 263,000 jobs in November and wages rose 0.6% month-over-month, both well above expectations and signs that the jobs market isn’t being held back by higher interest rates. Unemployment was unchanged at 3.7%. Treasury yields advanced and stock futures declined more than 1% on after release of the monthly jobs report by the Department of Labor.
While no one wants to see anyone lose their jobs, bullish stock market investors had hoped that the employment situation would cool off, easing pressure on wage growth and inflation. Today’s report showed pretty much the opposite. Notably, workforce participation remained weak at 62.1%. A higher number might have indicated more people getting back into the job market and a possible slowdown in wage levels that are driving inflation, which is at a four-decade high.
That didn’t happen.
Analysts had expected jobs growth of around 200,000 after October’s upwardly-revised 284,000 gain. Wages had been expected to grow 0.3%, down from a revised 0.5% figure in October. Instead, wages kept rising, up 5.1% over the last year. That’s good news for workers, but likely bad news for inflation.
Earlier this week, Fed Chairman Jerome Powell said wage growth is a good thing, but it still needs to ease or prices for services won’t come down. He noted that everything from haircuts to health care costs keep climbing, in part due to wage pressure. The big obstacle to getting wage growth to level off, he added, is a shortage of workers, according to a report in Politico. The labor force participation number today doesn’t show much promise in that particular category.
Jobs growth wasn’t limited to any single category in November. It was strong all around, according to the Labor Department. Leisure and Hospitality jobs growth led all categories with growth of 88,000, followed by health care at 45,000 and government at 42,000. The construction sector added 20,000 jobs, and manufacturing added 14,000. Those last two are categories you frequently see decline when the economy comes under pressure.
There were a couple of notable category declines. Retail jobs fell 30,000 and transportation and warehousing fell 15,000.
The report could put pressure on the Fed. Before the announcement, investors had put odds of a 50-basis-point rate hike later this month at around 78%, according to the CME’s FedWatch Tool. That declined quickly to 69% after the jobs data, with the futures market now dialing in more than a 30% chance that the Fed has to hike rates 75 basis points once again when it meets December 13-14. Keep an eye on that indicator in coming days.
One other Fed consideration is where the “terminal,” or peak, interest rate will be. The Fed’s next dot-plot, its quarterly projection of future rate levels, is due December 14. If the terminal rate grows significantly from the last report’s median of 4.6% and wage and jobs pressure continue, the road to the terminal rate could take longer if the Fed actually remains committed to slower hikes as Powell indicated on Wednesday.
Numbers to Know
Here are three numbers to keep in mind as we approach the weekend, courtesy of Charles Schwab’s Chief Market Strategist Liz Ann Sonders:
- 93%: The percentage of S&P 500 members trading above their 50-day moving average (MA). That’s the highest percentage since June 2020 and “just barely” above thresholds crossed in August 2022 and April 2021.
- 416%: Challenger Gray & Christmas reports that job cut announcements were up 416% year over year in November, a significant increase from 48% in the previous month and the largest jump since July 2020. Of these, 24% were due to cost-cutting, and 16% were due to market conditions. Could this be a “canary” for the market?
- 2.8%. The Atlanta Fed’s GDPNow estimate for Q4 growth fell to that Thursday from the previous 4.3% based on recent data including a few of the numbers we saw yesterday. Quite the haircut.
One big data point that both GDPNow and stocks reacted to Thursday was a disappointing November ISM Manufacturing figure of 49%. The number was down from 50.2% in October and below the 50% level that indicates expansion for the first time since May 2020. That broke a 29-month expansion streak, according to Briefing.com.
Headline ISM wasn’t the only bearish part of the report. There were also interesting numbers lower down that raised worries about the economic picture. For instance, the prices component fell to its lowest level since May 2020; new orders also slipped.
Coming after a very soft Chicago PMI report Wednesday and slower manufacturing data from Asia recently—including China—Thursday’s ISM rained a bit on the market’s mid-week parade, though stocks entered Friday up sharply for the week.
Inflation appears to be easing a bit, and that’s certainly welcome on Wall Street, judging by November’s rally. Still, reports like these raise the question of what damage the Fed did trying to fix that problem. October Factory Orders next Monday is another report to watch for possible evidence of sliding manufactured goods demand.