The November jobs report was near perfect, with the economy adding 199,000 jobs and the unemployment rate falling back to 3.7 percent. Wage growth has slowed to a pace consistent with the Fed’s 2.0 percent inflation target, while still outpacing inflation, allowing for modest real wage gains.
The big question in the December report is whether the good news will be sustained. With unemployment insurance filing staying low, and retail sales remaining strong, it seems likely that we will again have a good report this month.
Will Job Gains Broaden?
The one concern that several analysts raised about the November report was the narrow basis for the job gains. The government, healthcare, and restaurant sectors accounted for virtually all of the November job growth once we accounted for the effects of returning strikers in the auto and entertainment industries.
If we are to have a sustained recovery, it would be good to see job growth spread somewhat more evenly across sectors. One possible candidate for a turnaround is retail, which reported a decline of 38,400 jobs in November. This is likely due to seasonal adjustment issues, with stores doing less holiday hiring than would ordinarily be the case. (The unadjusted job gain in November was 264,200.)
If that story is right, we are likely to see little change in December (most holiday hiring takes place in November) and then strong job growth in January, as fewer workers than normal are laid off. We might also look for at least modest December job gains in manufacturing (outside of autos), transportation, and professional and business services, all of which reported job losses in November.
Hours Growth; Will We Have Another Strong Quarter for Productivity?
We had extraordinary productivity growth reported for both the second and third quarters, at 3.5 percent and 5.2 percent respectively. The productivity data are hugely erratic and subject to large revisions. However, the extraordinary growth of the last two quarters does raise the hope that we could be on a faster growth path.
While no one would expect anything like the growth seen in the last two quarters to continue, we could plausibly see growth over 2.0 percent. The index of aggregate weekly hours has increased at roughly a 1.2 percent annual rate so far in the quarter, with self-employment down modestly. With GDP growing at roughly a 2.0 percent rate, we could get another encouraging quarter for productivity growth.
Will Wage Growth Accelerate?
The annualized rate of wage growth over the three months ending in November was 3.4 percent. This should make the Fed very comfortable in terms of hitting its 2.0 percent inflation target, but it arguably is a bit low given where the economy is at this point.
There was a large shift from wages to profits at the start of the pandemic. It is reasonable to expect that this will be largely or completely reversed, if the labor market remains strong. In fact, even prior to the pandemic, we had a long way to go to reverse the shift to profits that took place with the weak labor market following the Great Recession.
If the income share is going to shift back towards labor, we will need to see a period where wage growth runs somewhat faster than the sum of inflation and productivity growth. That would mean growth closer to 4.0 percent, especially if it’s the case that we are now on a faster productivity growth path. The data are erratic, even taking three-month averages, but there seems little basis for concern about excessive wage growth pushing inflation higher, as long as it’s under 4.0 percent.
Unemployment to Remain Constant
There had been a reported rise in unemployment of 0.5 percentage points between April and October. While the 3.9 percent October rate was still low by historical standards, the upward trend was worrying.
The November report allayed these concerns, with the reported unemployment rate falling to 3.7 percent. The reported employment growth of 747,000 brought the household and establishment surveys more closely in line. With job growth likely remaining strong through the month, there is little reason to expect any substantial change in the unemployment rate in December.
Asian American Unemployment Will Likely Fall
The unemployment rate for Asian Americans is usually slightly lower than the unemployment rate for whites. This pattern was reversed in November as the unemployment rate for Asian Americans rose to 3.5 percent, compared to a 3.3 percent rate for whites. The 3.5 percent rate is up from a 2.3 percent rate reported for July.
These data are erratic, so it is likely that this movement is driven largely by measurement error. But if that is the case, we should expect to see the unemployment rate for Asian Americans fall in December and future months.
Share of Unemployment Due to Quits to Remain Stable
The share of unemployment due to people who voluntarily quit their jobs rose to 13.1 percent in November, up from 12.6 percent in October. This is a measure of the perceived health of the labor market, since it means workers are willing to quit a job before having another job lined up.
The share of unemployment due to quits peaked at 15.8 percent in the fall of 2022. It fell back sharply over the course of 2023, as the labor market stabilized. The November share is consistent with a strong labor market, but not one where job turnover is so rapid as to cause serious disruptions.
Is Wage Inequality Still Falling?
One of the most remarkable features of the pandemic recovery has been the narrowing of wage inequality, as low-wage workers have seen the fastest wage growth. That pattern seems to be continuing. The average hourly wage for production and non-supervisory workers rose at a 4.2 percent annual rate over the last three months, nearly a percentage point faster than the overall pace of wage growth over this period. It will be interesting to see if this pattern continues into December.
Overall Labor Market Picture: Continued Strength and Healthy Wage Growth
It would be hard to envision a much better picture than what we saw in the November jobs report. The best we can reasonably hope for is more of the same.
We should expect to see more evidence of the benefits of high levels of employment. In addition to wage growth modestly exceeding inflation, we should see a disproportionate share of wage gains going to lower-paid workers. And, we should see benefits to minorities facing discrimination, with some narrowing of the Black-White and Hispanic-White employment and unemployment rates.
