Financial Review

Exasperating November Jobs Report

…..Economy adds 178,000 jobs in November. Unemployment rate drops to 4.6%.

Financial Review by Sinclair Noe for 12-02-2016

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The economy added 178,000 net new jobs in November. This was right in line with estimates around 175-180,000. The unemployment rate dropped to from 4.9% to 4.6%, a 9-year low. The September report was revised higher to 208,000 and October was revised lower to 142,000, for a net revision of 2,000 lower. Over the past 3 months, the economy has gained on average, 176,000 new jobs per month.


Private-sector payrolls rose by 156,000 in November. Government employment rose by 22,000 in the month. Employment in professional and business services rose by 63,000 in November and has risen by 571,000 over the year. Over the month, accounting and bookkeeping services added 18,000 jobs. Employment continued to trend up in administrative and support services (+36,000), computer systems design and related services (+5,000), and management and technical consulting services (+4,000).


Health care employment rose by 28,000 in November. Within the industry, employment growth occurred in ambulatory health care services (+22,000). Over the past 12 months, health care has added 407,000 jobs.


Employment in construction continued on its recent upward trend in November (+19,000), with a gain in residential specialty trade contractors (+15,000). Over the past 3 months, construction has added 59,000 jobs, largely in residential construction.


The retail sector shed 8,300 jobs in November, which could reflect a shift toward online shopping that has forced department stores such as Macy’s to close several stores. Retail jobs have declined for two straight months, which might be an indicator of holiday shopping trends. Employment in other major industries, including mining, manufacturing, wholesale trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government, changed little over the month.


The average workweek was unchanged at 34.4 hours. Average hourly earnings slumped 0.1% in November after a sharp rise in the prior month – down 3 cents to $25.89 per hour following an 11 cent increase in October; so this might just be smoothing out the numbers from month to month. Wages are up at a 2.5% annual rate. With CPI around 2% and PCE around 1.4%, this represents real gains in wages.


The drop in the unemployment rate is because 226,000 people dropped out of the labor force. The participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.1 percentage point to 62.7 percent last month, not too far from multi-decade lows. The participation rate for the 25-54 age group, people in their prime working years, decreased slightly to 81.4%. There are 1.85 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 1.97 million in October. The U-6 unemployment rate, a broader measure of unemployment which includes part-time workers who would rather work full time or those too discouraged to keep looking, dropped to 9.3% from 9.5%. That means there are millions of working age people neither working nor looking for work. So, for all the talk about full employment, there is still a good bit of slack.


In many ways, this was an exasperating jobs report. It’s hard to imagine a scenario in which unemployment is low and job growth is steady, yet wages are falling and people are leaving the labor force. An economy that is growing jobs and pushing unemployment rates to a 9 year low, yet leaving many workers on the sidelines, or off somewhere beyond the sidelines. And even as wages dropped last month, we are still seeing an increase in real wages year to date. It doesn’t seem to add up, and indeed it probably can’t continue to add up.

In November, the year-over-year change was 2.25 million jobs. As the labor market nears full employment, job gains have slowed from an average of 229,000 per month in 2015 to an average of 180,000 this year. Still, the monthly increases are more than enough to absorb new entrants into the labor market. Fed Chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with growth in the working-age population. It seems the economy is at an inflection point; with one of two likely outcomes; either the economy is strong enough to drag in the displaced and underutilized workers and we really have full employment, or new job generation will shrink. Don’t expect a quick change – this is something more likely to play out over a year or two rather than a month or two. The pool of people who formally count as unemployed – those who say they want a job and have looked for one in the last month – is down to 7.4 million, a huge number but the lowest since November 2007. To keep up that speedy job growth, employers will need to pull in people who don’t fit the perfect job description but who are able and willing to work.


The average length of unemployment as of November was 26.3 weeks. This tied with September 2015 for the least time since August 2009, but it is still much higher than in August 2007, the most recent time unemployment was this low, when the average length of unemployment was just 17 weeks. Additionally, the percentage of workers who have been out of a job for six months or more sits at 24.8% of all unemployed. This is solid for this cycle, the lowest figure since March 2009, but again it is well above the same number when the unemployment rate was most recently at 4.6%. In August 2007, the percentage was just 17.5%.


There have been 81 consecutive months of private-sector job growth, the longest streak on record. And the unemployment rate has been more than cut in half from a recession high of 10%.  And many employers say they are having a tough time finding skilled workers. The unemployment rate for Americans who have less than a high-school diploma and are over 25 (so unlikely to be in college) is still well above its August 2007 level at 7.9%  -nine years ago it was 6.5%. So yes, the labor market is approaching the strength it had before the recession, and there is plenty to be happy about in the most recent jobs report. But, for those who still find themselves out of work, the American job market isn’t quite fixed yet.


Workers without skills are relegated to low paying jobs and even though several states and cities have raised the minimum wage, we are seeing no negative impact on hiring. No surprise.  The weight of evidence shows that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front. Yes, I know that there are pockets of problems with higher minimum wage, but that is anecdotal rather than empirical evidence. Meanwhile, workers with skills either aren’t interested in switching or they are not being offered enough money to switch. Employers have been reluctant to raise wages to a level that might lure back sidelined workers, and the idea of training workers, especially through apprenticeship seems like a relic from ancient history. The result has been that the country has 5.5 million job openings, a near-record level. The other consequence is that wages have been rising at a snail’s pace, with no signs of wage push inflation.


Many economists now say that we are at, or very near full employment. And the Federal Reserve appears to have reached that conclusion and will almost certainly raise interest rates as a result. US short-term interest rate futures rose slightly after the release of the jobs data. Absent some catastrophe in the next 10 days, the Federal Reserve will raise interest rates at their December 15th policy meeting. Whatever policymakers believed yesterday, they believe today. So, they will tap the brakes on the economy. The important thing is whether those policymakers believe there is still slack. It has been one year since the last Fed rate hike; that means they have been cautious and concerned about slack in the labor market. Is that caution still warranted? For President-elect Trump, he inherits an economy largely healed from the trauma of the last 9 years, yet still deeply scarred and susceptible to a relapse.


If the economy can avoid the sort of inflation pressures that today’s low unemployment rate would normally impose, that could mean that it can also accommodate the President-elect’s promised growth policies without pushing up prices dramatically and forcing the Fed to raise interest rates too quickly. If inflation jumps and the Fed responds with a sharp increase in rates, it could be an inflation triggering event. And don’t forget the structural headwinds of technology displacements and skill mismatches.


As part of a deal to keep jobs in the state, Carrier’s parent company United Technologies has received $7 million worth of tax breaks from the state of Indiana. In exchange, the firm will invest more than $16 million in its Indianapolis plant. Speaking at the factory, President-elect Donald Trump reiterated that American companies will not leave the country “without consequences,” but promised to lower the U.S. business tax rate “from 35% to 15%” and do away with “many regulations.”


And while that deal was good enough to grab headlines and good enough for at least some of the workers in Indianapolis, it will take far more to keep this train running on the right track.



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