U.S. Labour Market

Bottom line:

• November’s U.S. labour market data was largely as expected – a gentle slowing more consistent with normalization than cyclical weakness.
• Absent a big upside surprise in October CPI next week that could raise the odds that the Fed chooses to pause rate cuts, we think the data’s still soften enough to argue for additional rate cuts, and expect a 25-bps cut from in the December.

The Details:

• Today’s employment report matched consensus expectations with a 227k employment gain and a tick higher in the U.S. unemployment rate, to 4.2% (consensus was for 190k employment gain and 4.2% unemployment rate).
• Hiring demand was still strong but not enough to absorb rising labour supply – in November, there were 130k new and re-entrants to the labour market that became unemployed.
• That was a large part behind the rise in the unemployment rate. Job losers on the other hand were roughly unchanged – a 58k rise in permanent layoffs was offset by a 66k decline in temporary layoffs./li>
• In terms of the payroll gain, they were the most notable in health services (+54k) and leisure and hospitality (+53k). On a year-to-date basis, healthcare contributed about a third of the cumulative non-farm payroll gain this year.
• Retail on the contrary continued to see job losses, of 28k in November. Over the last 6 months, employment in retail has fallen by 62k.
• Total hours worked among private industry employees rose slightly in November by 0.1%. Durable goods manufacturing and leisure and hospitality led the increase (both were up 0.6%.)
• There are early signs that wage growth is picking back up. Average hourly earnings in November posted another big 0.4% increase. That leaves the annual wage growth at 4% comparing to 3.6% this July.
• Fed’s pace of easing has already slowed and recent communications from Fed speakers continue to hint at further but smaller rate cuts. We maintain our base case, and expect a 25-bps reduction in each of December and January before the Fed pauses and reassesses.

Bottom line:

• The tiny 12k payroll employment gain in October was heavily distorted by the impact of hurricanes, a large strike in the manufacturing sector, and an unusually low initial survey response rate. The unemployment rate was likely a ‘cleaner’ read on labour markets in October, and it was unchanged from September and still slightly below levels in the summer..
• Underlying details are still consistent with a softening in labour markets – permanent layoffs rose and downward revisions knocked 112k off payroll employment growth in August and September – but still at a very gradual pace that is consistent with a ‘normalization’ from unusually low unemployment levels rather than a faltering.
• Interest rates are still likely higher than they need to be for inflation to return fully back to the Fed’s 2% inflation target, and today’s data helps to reinforce our expectation that the Fed will cut rates by 25 basis points next week.

The Details:

• Payroll employment rose just 12k in October (the smallest increase since the pandemic) and the private employment count declined outright (-28k)
• But the payroll employment numbers were heavily distorted by hurricanes, striking workers in the manufacturing sector, and reportedly an unusually small initial survey response rate.
• A decline of 44k in transportation equipment manufacturing was reportedly largely strike related, and explained most of a 46k drop in manufacturing jobs
• Virtually all measures from the payroll employment survey were likely distorted in October, but leisure and hospitality and retail employment both edged lower and professional & business services fell 47k
• The unemployment rate, though, is not as significantly impacted by those distortions – striking workers and those away from work due to bad weather are not counted as unemployed – and that ‘cleaner’ read of labour markets held steady at 4.1%.
• Underlying an unchanged unemployment rate, though, permanent layoffs rose by 153k — layoffs are still very low as a share of the labour force but have been gradually edging higher.

• September’s U.S. employment report beat expectations by printing a solid 254k employment gain alongside a tick lower in the unemployment rate, to 4.1% (consensus was for 140k employment gain and a 4.2% unemployment rate).
• The strong report saw dropping market odds for another 50-bps rate cut in the Fed’s next meeting in November – the payroll gain was the largest in six months. Leisure and hospitality led the increase, adding 78k jobs thanks to smaller-than-usual seasonal decline this September. Health services (+45k) and government hiring (+31k) also contributed.
• The number of workers on both temporary and permanent layoffs were little changed in September, and 10% and 18%, respectively, higher than levels one year ago.
• Total hours worked among private industry employees fell slightly in September by 0.1%, with gains in constructions and leisure and hospitality more than offset by losses in other services sectors including retail.
• After a larger monthly increase in August, average hourly earnings rose by a robust 0.4% to push the yearly reading for wage growth higher to 4% in September. This was after cooling labour demand that has led yearly wage growth persistently lower from almost 6% in spring of 2022.

Bottom line:

• If you take September’s U.S. monthly jobs report as the best gauge of the health of the U.S. economy, the most recent report says conditions are far from crumbling, but holding onto the “American resilience” theme just fine. Taken alone, the strength of the report will take the pressure off of the Fed to reduce rates by another 50bps chunk at its November 7th meeting and ups the chances of a 25bps cut, though with still plenty of data to contend with before then.
• The story isn’t completely cut and dry, however. Other U.S. jobs market data, like job openings quit rates and various surveys still suggest momentum is trending downwards and will keep the U.S. central bank focused on downside risks, happy to be surprised to the upside as opposed to the reverse.
• For Canada, a more aggressive downturn in the U.S. has long been a risk for the economy that’s suffering from its own set of domestic challenges. We think today’s U.S. Jobs report also take some of those worries away from the Bank of Canada as they grapple with a 25bps or 50bps cut decision on October 23rd. Although they still have plenty to contend with.

• U.S. non-farm payroll gain of 206k in June was close to consensus but after downward revisions to each of April and May that shaved 111k off of employment gains in those prior months.
• In June, it was again new hires in government (+70k) and health services (49k) that accounted for the lion’s share of job growth. All other private sector employment grew by a smaller 90k, with gains in construction (+27K) and wholesale (+14K) offset by losses in professional and business services (-17k), retail (-9k) and manufacturing (-8k).
• The separately released household survey showed the U.S. unemployment rate ticking higher to 4.1%. That’s half a percent higher than the unemployment rate a year ago while the labour force participation rate stayed unchanged from last year, at 62.6%.
• Among the unemployed, those that were jobless for 27 weeks and more saw a sharp rise in June, by 166k to 399k above levels a year ago.
• Total hours worked among private industry employees contracted by 0.2% in June after a big gain in May. On a quarterly basis, private hours worked increased by about 2% (annualized) in Q2.
• Finally, wage growth after having risen sharply in May slowed in June. Average hourly earnings rose by 0.3% or 3.9% from last year. To-date, a lot of that increase still reflects a catching up to past high inflation – real hourly earnings as of May (the last available CPI data) grew by 0.4% each year since 2019, much slower than the 1.1% trend rate in the three years pre-pandemic.
• Bottom line: June brought another robust payroll gain in the U.S. but according to the meeting minutes, FOMC participants have begun to question if job gains in the establishment survey have been overstated with the separately calculated unemployment rate continuing to rise. Jobless claims have been broadly edging higher in recent weeks and survey data has also pointed to rising uneasiness with employment situation among consumers in the U.S. Overall, the slowdown in labour market conditions is evident but slow, just as the progress with easing inflation. That means the Fed will need more time and more data before committing to lowering interest rates. We think won’t come until December.