Highlights:
- Payroll employment rose 228k in November, one of the strongest gains this year. Impressive job growth over the last two months partly reflects continued recovery from the hurricane-related slowing in September.
- The unemployment rate held steady at a cycle low of 4.1%.
- A broader measure of unemployment that includes marginally attached workers and those employed part time for economic reasons edged up to 8.0% but is still down more than a percentage point from a year ago.
- Wage growth ticked up to 2.5% in November from a two-year low of 2.3% in October.
Our Take:
Not that they really needed it, but today’s payroll report gives the Fed a green light to raise rates next Wednesday. With hurricane-related volatility largely behind us, economic conditions are clearly strong enough for businesses to continue hiring at an impressive pace for this point in the cycle. Unemployment was steady in November, but if job growth continues at the 170k rate seen over the last three months, the jobless rate should drift even further below what the Fed sees as sustainable in the longer run.
With a move at December’s meeting widely expected, attention will be focused on how the central bank sees monetary policy evolving in 2018. Key to that debate will be wage and inflation dynamics. The Fed can only raise rates so much in anticipation of increasing price pressures—we’ll need to see wage growth and inflation actually picking up for the committee to hike more than once or twice next year. In that respect, today’s report wasn’t exactly stellar. Wage growth ticked higher but remained at the lower end of the range seen over the last two years. An upward trend will need to continue for policymakers to become confident that rising labour costs are putting a floor under inflation. For our part, we expect a 4% unemployment rate, combined with what is clearly strong hiring demand, will boost wage growth next year, helping inflation return to 2% on a sustained basis. If upcoming payroll and inflation reports provide evidence of that dynamic, we think the Fed will raise rates once a quarter in 2018.
