United States

November jobs report gives Fed ammunition for December rate hike

Wage gains and tight labor market to define 2017


The November U.S. jobs report was about as close to a “Goldilocks” report as one could imagine. The topline estimate of 178,000 new jobs created is in line with the 2016 monthly average of 180,000, and the unemployment rate declined to 4.64 percent as the number of unemployed individuals dropped by 387,000. The year-ago pace of average hourly earnings cooled to a 2.5 percent pace and aggregate hours worked posted a three-month average annualized increase of 1.9 percent.

This report provides enough cover for the Federal Reserve to lift rates in December by 25 basis points as it begins to shape expectations that it will meet its own forecast for three additional 25 basis-point rate increases in 2017 as inflation moves toward the central bank’s 2 percent target next year.

The underlying details of the report were mostly positive and the composition of hiring remains titled toward high-wage jobs. Apart from a modest decline in manufacturing hiring, job gains in goods production and construction were solid while manufacturing, business services, education, health, leisure and hospitality all posted robust gains on the month. It is a little hard to square the decline of 8,000 jobs in retail hiring with the multiple reports from retailers of strong holiday hiring, so we anticipate upward revisions to the topline estimate when the December report is published on Jan. 6.

The underemployment rate declined to a cyclical low of 9.3 percent. Our preferred metric of the labor force, the U6-U3 spread, stands at 4.7 percent, just above its long-term average of 4.6 percent. Given the fact that the economy is generating more than twice as many jobs as necessary to stabilize the unemployment rate, it is quite clear that the U.S. economy is at full employment. 

Businesses are likely to find it difficult to find qualified workers to fill skilled positions, therefore it is probable that the pace of hiring will slow on a monthly basis next year. Moreover, this labor data is consistent with a strong move upward in wage gains, implying narrowing profit margins in the near term. 


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