Highlights:
- November payroll employment rose 155k which was down from both the 198k expected going into the report and the 237k increase in October (previously reported as up 250k).
- The unemployment rate remained unchanged at a historically low 3.7%.
- The annual increase in wages remained unchanged at 3.1% though it is up from 2.5% a year ago.
Our Take:
November payroll employment rose a smaller-than-expected 155k. Going into the November release some moderation was expected from the 237k jump that was recorded in October. The falloff in hiring in November was abetted by a disappointing 5k rise in construction employment that was down from an average gain over the previous three months of 23k. The increase was also restrained by government employment dropping 6k after a 14k decline in October. Some offset was provided by a solid 18k gain in the retail sector implying optimism among retailers of above-average sales over the Christmas shopping period. The average gain over the last two months of 196k is indicative of economic growth remaining at an above-potential growth rate. The reported November unemployment rate of 3.7% is in fact indicative of the economy already operating beyond capacity given the Fed’s own estimate of a long-run equilibrium unemployment rate as being within a range of 4.3% to 4.6%. The November wage measure reported an unchanged annual rate of increase of 3.1% though this rate has been steadily rising in earlier months and compares to a year ago rate of 2.5%. Though the November rate of increase in wages does not threaten the Fed’s inflation objective of 2%, assuming 1% productivity growth, such is not the case if the upward trajectory continues. To try to limit the inflationary risk of an economy operating beyond capacity, we assume that the Fed will continue to move interest rates higher. Our forecast assumes a 25-basis point hike in the current fed funds range of 2.00% to 2.25% at the upcoming December 18/19 FOMC meeting. We are assuming further gradual tightening through 2019 with 25 basis point hikes every quarter through that year.
