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December 8, 2017

November Employment Report

Key Data

Payroll: +228,000; Private: +221,000; Revisions: +3,000; Manufacturing: +31,000; Unemployment Rate: 4.1% (Unchanged); Wages: +0.2%

In a Nutshell

“Labor shortage? What labor shortage?”

What It Means

“The CEOs doth protest too much, methinks.” (Apologies to Shakespeare). If workers are so scarce, why are firms managing to find so many workers? Once again, we had widespread, strong increases in payrolls in November. While there was the usual strength in health care and business and professional services, it was the huge increase that was so eye-opening. The last two months have seen significant gains in manufacturing positions with the increases widespread. Indeed, over the past three months, nearly 60 percent of the manufacturing industries expanded their payrolls.
On the unemployment front, the rate remained at an extremely low level. The labor force expanded, though it is up only 0.7 percent over the year. That is a little better than in most of the post-recession period, but nothing to hang a robust growth estimate on. The labor force participation rate was stable and up a tick from a year ago. That is actually good given the demographic trends.
The one disappointing number, at least if you are a worker, was the modest rise in the hourly wage number. People worked longer, so incomes will rise, but the limited gain over the year of 2.5 percent is not a whole lot above the inflation rate. With spending power rising by less than one percent, it is hard to get strong consumption growth, especially with the savings rate so low.
The University of Michigan’s first reading of December Consumer Sentiment was released and despite the passage of competing tax bills, it fell. I guess you can fool some of the people all the time but most of the people are not fooled by who gains and who doesn’t.

Markets and Fed Policy Implications

There is an old saying that you should watch what I do, not what I say. Businesses leaders place finding so-called “qualified” workers at the top of their problem list but somehow they continue to hire lots of workers. And it is not as if the labor force is growing by leaps and bounds. That is the good news and it clearly indicates that the economy is strong. Indeed, this report, even with the modest wage gain, is enough to convince the FOMC to raise rates next week. With a tax bill likely to be passed, the members will have to start factoring in an even stronger growth rate next year. If the Fed is going to behave as it usually does, which is to take the punch bowl away as the party is starting, well a tax bill will set off the party. The members may be cautious right now about next year’s rate hikes, but that could change once the bill is passed and the fourth quarter GDP report is released. I expect them to indicate three hikes next year but I am expecting four. As for investors, well happy days are here again. Firms are expanding, profits are already solid and they will jump with the reduction in tax rates – at least for those who actually pay high tax rates.
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