Payrolls and wages beat expectations and fly in the face of Fed rate hikes

Job growth was much better than expected in November despite aggressive efforts by the Federal Reserve to slow the labor market and fight inflation.

Nonfarm payrolls rose 263,000 for the month while the unemployment rate was 3.7%, the Labor Department reported Friday. Economists polled by Dow Jones were looking for a 200,000 increase in payrolls and a 3.7% increase in the unemployment rate.

The monthly gain was a slight decrease from October’s upward-revised 284,000. A broader measure of unemployment that includes discouraged workers and those in part-time jobs for economic reasons fell slightly to 6.7%.

The numbers are unlikely to do much to slow a Fed that has steadily raised interest rates this year to bring down inflation, which is still near its highest level in more than 40 years. The rate hikes brought the Fed’s benchmark overnight borrowing rate back to a target range of 3.75% to 4%.

In another blow to the Fed’s anti-inflation efforts, average hourly earnings jumped 0.6% for the month, double the Dow Jones estimate. Salaries rose 5.1% year-over-year, also well above the 4.6% expectation.

The Dow Jones Industrial Average fell 350 points after the report on concerns that hot jobs data could make the Fed even more aggressive. However, stocks pared most of their losses as the close of trading approached. Treasury yields initially jumped on employment news before turning mixed later.

“Having 263,000 more jobs even after policy rates were raised by some [375] basis points is no joke,” said Seema Shah, chief strategist at Principal Asset Management. “The labor market is hot, hot, hot, which is putting increasing pressure on the Fed to continue to raise key interest rates.

Leisure and hospitality led the job gains, adding 88,000 jobs.

Other gaining sectors included healthcare (45,000), government (42,000) and other services, a category that includes personal and laundry services and which posted a total gain of 24,000. saw an increase of 23,000, which the Department of Labor says brings the sector back to where it was in February 2020 before the Covid pandemic.

Construction added 20,000 positions, while information increased by 19,000 and manufacturing recorded a gain of 14,000.

In contrast, retail establishments reported a loss of 30,000 jobs ahead of what is expected to be a busy holiday shopping season. Transportation and warehousing also saw a decline, down 15,000.

The numbers come as the Fed has hiked rates half a dozen times this year, including four consecutive increases of 0.75 percentage points.

Despite the moves, job gains had been solid this year, although a little below the rapid pace of 2021. On a monthly basis, payrolls increased by an average of 392,000 compared to 562,000 for 2021. Demand continues to outstrip supply, with approximately 1.7 positions open for every available worker.

“The Fed is tightening monetary policy but someone forgot to tell the labor market,” said Fitch Ratings chief economist Brian Coulton. “The good thing about these numbers is that they show that the US economy has firmly returned to growth in the second half of the year. But continued employment expansion at this speed will do nothing to ease the imbalance. between labor supply and demand that worries the Fed.

Fed Chairman Jerome Powell said earlier this week that job gains were “far above the pace needed to adjust to population growth over time” and said wage pressures were contributing to inflation.

“To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it must be consistent with 2% inflation,” he said in a speech Wednesday at Washington, DC.

Markets expect the Fed to raise its benchmark interest rate by 0.5 percentage points at its meeting later this month. This should be followed by a few more increases in 2023 before the central bank can pause to see the impact of its policy measures on the economy, according to current market prices and statements from several central bank officials. .

Friday’s numbers had little impact on rate expectations, with traders assigning a nearly 80% chance the Fed would walk away from a half-point hike, according to data from the CME Group.

“The economy is big and it takes a long time, many months, for these things to filter through,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, said of the rate increases. “The impact of these rate hikes hasn’t really been felt yet. Powell is understandably a bit cautious.”

Powell stressed the importance of getting labor market participation back to pre-pandemic levels. However, November reports showed turnout fell by a tenth of a percentage point to 62.1%, tied with the lowest level of the year, with the labor force falling by 186,000 and being now slightly below the February 2020 level.

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