When a miss is not a miss

While the addition of 210,000 new jobs in November was lower than most economists anticipated, delving deeper into the data shows that a combination of labor force participation, hours worked, and a positive diffusion index that showing that more firms are hiring than laying off workers means the underlying momentum in jobs growth remains. The economy is likely strong enough to support jobs gains at a pace that will continue to return employment to pre-pandemic levels in the months to come.

Here is a closer look at the details that comprise this assessment:

• Labor-force participation: The number of workers participating in the labor force is the most important indicator in this month’s jobs report. For prime-age workers, i.e., those between ages 25 and 54, participation rose to 81.8%. While this remains below pre-pandemic levels, the rate continues to trend up in 2022.
• Household Survey Shows Strong Gains: In addition to a survey of firms from which the headline jobs number is derived, the Bureau of Labor Statistics (BLS) also surveys households. While there is sometimes significant discrepancy between the two surveys, this is usually diminished by revisions in subsequent months. This month the household survey showed job gains of 1.1 million compared with the 210,000 jobs in the survey of firms¹. The unemployment rate is derived from the household survey and it is the 1.1 million job gains combined with a higher labor force participation rate that caused the unemployment rate to drop sharply to 4.2%.

Changing workforce dynamics drive wage pressures

Average wages grew at a healthy clip in November, posting a year-over-year gain of 4.8%. We expect wage pressures to persist, especially in jobs that do not require a college degree, in part because the labor force continues to become more educated and in part because of the 2 million workers over the age of 55 that retired during the pandemic, a larger percent did not have a college degree. This is a structural shift that we highlighted in our latest chartbook.

A significant portion of the uptick in the labor force participation rate in November was driven by a return of women to the labor force as 99% of schools are now open, alleviating childcare concerns for many parents. However, as young children are still unable to receive the vaccine, the number of childcare workers employed is still 10% below pre-pandemic levels, suggesting that childcare availability is likely to continue to weigh on labor force participation.

Health concerns have also impacted the labor supply, especially in sectors with a high number of in-person jobs such as the leisure, hospitality, and retail sectors. Labor shortages, particularly for lower-skilled labor, is one reason that the pace of wage gains for nonsupervisory employees has been outgaining that of supervisory workers. This trend is likely to persist and could worsen should the emergence of new COVID-19 variants increase both childcare and healthcare concerns.

Other aspects of note in this month’s report include:

Hours. The number of hours worked remains elevated at 34.8 hours, sign that firms are pressing their existing workforce to do more rather than hiring new workers. This trend is likely driven by worker shortages, some misalignment of skills, and remaining friction in the labor market. If labor-force participation continues to increase, hours worked should moderate while jobs growth maintains a healthy pace.

Outlook for Interest Rates and the Economy:

Due to the underlying factors in the jobs report, we expect that not only will this number be revised higher in subsequent months, we anticipate jobs growth averaging 337k in 2022. This will likely result in continued strong consumer spending, which is consistent with our forecast of economic growth of 4.4% for 2022.

The combination of strong growth, inflation that is expected to remain above the Fed’s target, and an unemployment rate that is likely to fall to the long-run rate of 4% in the first half of 2022, all point to higher short-term interest rates. We anticipate the Fed will announce a faster pace of reducing asset purchases, aka quantitative easing, at their December meeting. This will pave the way for the Fed to raise interest rates in the summer of 2022.

Our analysis of the data suggests the economy will be strong enough to absorb the first increase in interest rates, which we anticipate will occur in the summer of 2022, with two more rate increases likely before the year ends. More specifically, we believe the economy is strong enough to accommodate a Fed Funds rate target of 0.75% to 1.0% by the end of 2022.