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The U.S. economy added 199,000 jobs last month, and the unemployment rate dropped to 3.7%, the Bureau of Labor Statistics reported Friday. That’s compared with consensus estimates for 150,000 new jobs and a 3.9% unemployment rate.
Now, there’s a growing chorus of experts who believe the labor market’s strength is another sign that the economy may be able to avoid the recession that so many Wall Street forecasters once argued was inescapable.
“Just when you think the economy is finally softening, it continues to show signs of strength,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said of the jobs report Friday. “The recession that seemed so inevitable at the end of 2022, still hasn’t arrived and may not come anytime soon.”
Cooling, but not freezing
Overall, the latest jobs report showed a labor market that continues to “ease but not fall off a cliff,” as Morgan Stanley’s chief U.S. economist, Ellen Zentner, put it in a Friday note.
Although the unemployment rate fell in November, job growth was limited to certain sectors of the economy. Most jobs added came from the health care sector (77,000) and new government positions (49,000), while the 28,000 job gain in the manufacturing sector was largely the result of the autoworkers’ strike coming to an end, rather than new job growth.
”The main reason for lackluster job growth across most of the economy is high-interest rates,” ZipRecruiter chief economist Julia Pollak said.
This is good news for the Fed, which has been hoping to use rate hikes to cool the economy and pull off a “soft landing”—when inflation fades without a subsequent spike in unemployment. But if the cooling trend turns to freezing, that could be more concerning for the economy’s long-term health.
Also last month, average hourly earnings, a key factor in the Fed’s inflation outlook, grew 4.3% from a year ago. That’s down from 4.4% in October, but still well above what Fed officials would likely be comfortable with. “The data suggests that wage growth is cooling, but only ever so gradually,” Pollak said. Wage growth above 4% can make it difficult for the Fed to push inflation down to its 2% target.
The Federal Reserve in limbo
The labor market’s resilience juxtaposed with the steady drop in U.S. inflation will make the Fed’s upcoming interest rate decisions challenging. Low unemployment and rising wages could spark a resurgence of inflation in 2024, forcing Fed officials to keep interest rates elevated.
“If today’s report is a harbinger of continued consumer spending the Fed may have to issue a considerably more hawkish message and telegraph that they still cannot declare victory on their campaign to quell inflation,” LPL Financial’s chief economist Quincy Krosby explained, arguing “the Fed has been stymied by better than expected data releases.”
However, if the labor market cools too much, it could soon freeze, leading to a recession and forcing the Fed to cut interest rates. The central bank’s chairman, Jerome Powell, explained this conundrum in an October speech.
“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he said, but “doing too much could also do unnecessary harm to the economy.”
The never-ending recession debate
While the Fed is torn over whether to cut interest rates or hold them steady, the labor market’s resilience has added ammunition to optimistic forecasters’ arguments that a soft landing lies ahead.
BOK Financial chief investment strategist Steve Wyett said the latest jobs report, as well as recent positive data on job openings, “indicates a job market coming into balance in a way which supports the idea of a soft landing for the economy.”
Meanwhile David Royal, chief financial and investment officer at Thrivent, said the jobs report was “strong across the board,” pointing to the increase in the number of people entering the workforce and total number of hours worked. “All of this information is consistent with continued economic expansion heading into 2024,” he argued.
But some more pessimistic experts still believe that the Fed’s interest rate hikes will ultimately freeze the cooling labor market and spark a recession—so the now over two-year-old debate continues.
“The key uncertainty for the labor market in 2024 is whether job growth slows to a more sustainable pace, or whether the economy moves from monthly job gains to monthly job losses,” PNC chief economist Gus Faucher said Friday. “PNC still thinks recession is the more likely outcome in 2024, but it is a close call.”
- The data came in better than expected, with signs of a strong labor market across the board: Payrolls rose 199,000 in the month, more than the 185,000 average estimate of economists. The unemployment rate tightened to 3.7%, below all forecasts and a four-month low. And the participation rate ticked up to 62.8%. Weekly hours also rose, a sign of demand.
- Average hourly earnings rose 0.4% from the prior month, matching the high estimate from analysts. This is great for workers, but a troubling sign for the Federal Reserve, as they seek to cool inflation and spending.
- Job gains were led by health care, government, and manufacturing. Payrolls got a 30,000 boost from auto workers returning from the picket lines. Government hiring was led by state and local bodies. And as we’ve seen over the past year, healthcare gains were driven by demand in-home care. Payrolls also got a boost of 17,000 from the resolution of the Hollywood labor dispute.
- This report, especially if this kind of strength is repeated in December, complicates the Fed’s outlook. Payrolls and labor demand were expected to start slowing, but the opposite happened. What this report makes clear is that the labor market is strong, consumers are in a great place to keep spending and there are few signs of recession — at least judging by job data.
- S&P 500 and Nasdaq futures initially plunged in the minutes after the report was published, before moderating as markets digested the data. Two-year treasury yields rose about 9 basis points earlier.
U.S. applications for jobless benefits ticked up last week, but the overall number of people in the U.S. collecting unemployment benefits fell after hitting its highest level in two years last week.
Unemployment benefits claims rose by 1,000 to 220,000 for the week ending Dec. 2, the Labor Department reported Thursday. That was in line with analyst expectations.
About 1.86 million were collecting unemployment benefits the week that ended Nov. 25, 64,000 fewer than the previous week. It’s just the second time in 11 weeks that continuing claims have fallen.
Analysts say the continuing claims have been rising because many of those who are already unemployed may now be having a harder time finding new work. That comports with a government report earlier this week showing that U.S. employers posted 8.7 million job openings in October, the fewest since March of 2021.
Jobless claim applications are seen as representative of the number of layoffs in a given week.
Hiring has slowed from the breakneck pace of 2021 and 2022 when the economy rebounded from the COVID-19 recession. Employers added a record 606,000 jobs a month in 2021 and nearly 400,000 per month last year. In the past five months, job gains have slipped to an average of 190,000 per month, down from an average of 287,000 in the first five months of the year.
Analysts forecast that U.S. private non-farm job gains will come in around 173,000 when the government issues its November jobs report on Friday.
The Federal Reserve has raised its benchmark interest rate 11 times since March 2022 to slow the economy and rein in inflation that hit a four-decade high last year. The job market and economic growth remained surprisingly resilient, defying predictions that the economy would slip into a recession this year.
Labor’s layoffs data Thursday also showed that the four-week moving average of jobless claim applications — which flattens out some of the weekly volatility — ticked up by 500 to 220,750.