The U.S. economy churned out a solid 228k new jobs in November, better than markets were expecting. The unemployment rate held steady at 4.1%, a 17-year low.
The details of the report were solid. Employment growth on the goods side of the economy accelerated (+62k) on gains in construction (+24k) and manufacturing (+31k). The services sector posted a solid 159k new positions led by education & health (+54k) and business services (+46k).
The fact that the unemployment rate held steady is impressive, given last month’s drop to 4.1% was driven by a sizeable drop in the labor force (-765k). In November growth in the labor force roughly kept pace with job creation. The overall participation rate was unchanged at 62.7%. The employment to population ratio fell slightly to 60.1%, but is still higher than a year ago.
One small cloud in the report was a modest gain in average hourly earnings (+0.2% m/m). On a year-on-year basis wage gains are up a 2.5%. That pace is faster than inflation, but is increasingly looking like a puzzle in a labor market where the pool of unemployed and discouraged workers is below its pre-recession levels.
Key Implications
The U.S. job market continued its impressive performance in November. The Fed is well justified in classifying the U.S. at full employment.
Modest wage gains are a little perplexing, but they are likely to pick up in the months ahead. Other measures of wage growth show healthier increases. The Atlanta Fed wage tracker has been hovering round 3.5% year-on-year over the past two years.
As Republicans in Washington work feverishly to finalize a tax plan, the tight labor market increasingly looks to be a constraint that will limit the impact on economic growth. As workers become harder to find, this may be the impetus that sparks the much-anticipated acceleration in wage growth.
It is all systems go for a rate hike next week by the FOMC. While there may be some on the Fed who express concerns about the modest pace of core inflation, we have seen some progress on that score. Continued progress in the labor market should see the Fed continue to raise rates at a gradual pace.
