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A headscratcher

The November jobs report's low headline number belies its internal strength. 

Published December 3 2021
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Nonfarm payrolls experienced their smallest gain of the year in November, posting a much weaker-than-expected addition of only 210,000 jobs this morning. The Bloomberg consensus was for an increase of 550,000 jobs, and our more optimistic forecast here at Federated Hermes was for a gain of 589,000. However, the low headline number is completely inconsistent with notable strength throughout the balance of the report, suggesting we’ll see a sizable upward revision in coming months.

Seasonal adjustment concerns The Bureau of Labor Statistics (BLS) reported that on a non-seasonally adjusted basis, November payrolls grew by a strong 778,000 jobs. Normally it calculates this number seasonally, typically adjusting it downward by an average of 200,000 jobs. That would have resulted in a seasonally adjusted gain of 578,000—right smack in the middle of consensus. Inexplicably, the BLS instead chose to reduce today’s non-seasonally adjusted print by 568,000 jobs, resulting in the disappointing increase of only 210,000.

September and October collectively received upward revisions of 82,000 jobs. Adjusting the report for a seasonal adjustment of 200,000 jobs and adding the 82,000 translates into a normalized trendline gain of 660,000.

Fed set to accelerate Stocks are selling off sharply on this morning’s confusing jobs report. In our view, the Federal Reserve will look through the headline figure and focus on the underlying strength of the labor market. In conjunction with their concerns about soaring and sustainable inflation, we expect the policymakers to accelerate their tapering program. In November and December, they are reducing monthly bond buying at a pace of $15 billion, but they might double that pace in the first quarter. That would end asset purchases in March 2022, setting the table for quarter-point rate hikes starting in the second quarter.

Wage inflation remains hot Average hourly earnings rose 0.3% in November month-over-month and 4.8% year-over-year. But over the past eight months, wages have surged at an annualized clip of 5.6%. This continues to concern us. Accelerating—and we think sustainable—inflation is taking a bigger chunk out of workers’ paychecks, prompting many to change jobs or demand salary increases. Just this week, Fed Chair Jerome Powell instructed us to retire “transitory” from our lexicon. The Fed has officially thrown in the towel on arguing for temporary inflationary pressures. This comes amid news that striking employees at Deere accepted a new contract because management included the cost of living adjustment (COLA) clause. This kind of development can result in a self-reinforcing inflationary cycle, in which companies pass higher labor, shipping and commodity costs onto customers in the form of elevated prices, forcing workers to demand even higher wages. 

Claims, ADP, JOLTS and Challenger job cuts still strong Initial weekly jobless claims fell to a post-pandemic cycle low of only 194,000 two weeks ago, down 97% from their April 2020 peak. The ADP private payroll survey rose by a stronger-than-expected 534,000 jobs in November, averaging 543,000 job gains over the past three months. The lagging Job Openings & Labor Turnover Survey (JOLTS) showed 10.4 million open positions in September, just off July’s record high of 11.1 million. Voluntary quits rose to a record 4.4 million in September, with a record quits rate of 3% as the “Great Resignation” continues. Finally, Challenger said job cuts plunged nearly 35% month-over-month in November to their lowest level since May 1993.  

Unemployment, labor impairment and participation rates improve The household survey surged for the fifth consecutive month in November by a powerful gain of more than 1.1 million jobs (versus 359,000 in October), and the number of unemployed people also fell for the fifth consecutive month by 542,000, more than double October’s pace. As a result, the unemployment rate (U-3) plummeted to a new cycle low of 4.2% in November, down from 4.6% in October and from 5.9% in June. We still expect it will approach its pre-pandemic cycle low of 3.5% over the next 12 months. The labor impairment rate (U-6) also plunged in November to 7.8% from 8.3% in October and 10.2% in May. The civilian labor force added 594,000 workers last month, nearly six times October’s gain of 104,000 workers. This surge pushed the participation rate higher to 61.8% in November, up from a stagnant 61.6% in October.

K-shaped recovery gathering momentum The so-called K-shaped labor market recovery took another huge step in the right direction in November, as the unemployment rate for low-wage individuals plummeted to 5.7% from 7.4% in October and 7.9% in September. High-paid workers, by comparison, saw their unemployment rate slip a tick to 2.3%.  

Why has the labor market improved so sharply for low-wage workers? The savings rate has fallen back to 7.3% in October from nearly 27% last March. Infections by the Covid delta variant peaked on Labor Day and have declined sharply in most states, although concerns about the new omicron variant have arisen recently. In addition, schools and child-care facilities have reopened and the $300 weekly Federal unemployment bonus ended in September. People finally are heading back to work, a positive trend we expect to continue. 

Sector details weak The manufacturing sector added a weaker-than-expected 31,000 jobs in November (consensus expectations of 45,000), and the BLS revised October’s count down from a preliminary gain of 60,000 jobs to 48,000. Construction rose for the third consecutive month, adding 31,000 jobs in November, but that’s sequentially slower than 43,000 in October and 35,000 in September. Despite an excellent start to the Christmas shopping season in October, retailers eliminated 20,000 jobs in November, after adding 38,000 workers in October and a downwardly revised 39,000 workers in September. Temporary hiring, a leading indicator of employment trends, added only 6,000 workers in November after a strong gain in October of 46,000 hires. Leisure & hospitality hired only 23,000 workers in November, down sharply from 170,000 in October and 108,000 in September. These all represent potential areas for an upward revision to today’s report in coming months.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

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