The Federal Open Market Committee (FOMC) erred on the side of caution by keeping the phrase “considerable time” in the statement, but not using it to describe policy moves going forward. Instead, members said they would be “patient” in raising rates. The change in verbiage is a bit of a bait-and-switch as the FOMC preps financial markets for an eventual liftoff in rates. Read More
Payroll employment jumped 321,000 in November and was revised up by 44,000 for the previous two months, bringing the last three-month average up to 278,000. Gains were broad-based, with particularly good gains in the business services sector (outside of temporary hires) where full-time, high paying jobs reside. This sector was among those hardest hit by the recession and is now coming back and providing jobs again.
We also saw a surge in hiring related to the holiday season and, to a lesser extent, hedging against costs associated with the Affordable Care Act. Retailers added a whopping 50,000 jobs during the month to increase the number of workers on the retail floors and hold the hours of individual workers below the 30-hour threshold associated with the ACA. Big box department stores were the exception with a drop of more than 4,000 jobs. Moreover, more than 20% of the pick-up in retail hiring occurred in the auto sector on showroom floors; selling vehicles is good for the economy, but not holiday spending.
The large number of new retail jobs is in addition to hiring in warehouses, stock rooms and transportation that shippers have engaged in to increase their delivery times and service for online shoppers. Many retailers and shippers were caught short of workers last year when unusually harsh winter weather and a commensurate surge in spending online delayed shipments during the holiday season. I was one of the unfortunate masses to have gifts “promised” to arrive by Christmas Day show up two days later. In the financial sector, insurance companies are hiring back after cutting earlier in the cycle, while manufacturing and construction employment edged higher but off of a low base.
More importantly, average hourly earnings picked up but remained just 2.1% higher than a year ago, which is a still tepid rate. Indeed, we need to see wages accelerate at a 3% pace for an sustained period to move core inflation measures (which the Federal Reserve watches most closely) back above the 2% target. Fed officials welcome the reduction in oil prices because it will stimulate spending, particularly during this holiday season. They remain somewhat concerned, however, that inflation expectations are falling, which given the risks of deflation abroad, could cause problems for spending in 2015.
The unemployment rate remained unchanged at 5.8%, while participation in the labor market also remained unchanged, This speaks to the issue of slack in the labor force, which is still significant but narrowing. The number of people unemployed for more than 27 weeks, or who were forced to accept part-time instead of full-time employment, continued to edge slightly lower.
Bottom Line: An upside surprise in jobs with more upward revisions is welcome news, especially as we near the end of 2014. The gains we are seeing have yet to deliver much in terms of wage gains, however, or reengage those who were sidelined by the recession. That is of particular concern to the Federal Reserve because the quality of jobs that we are generating matters as much for inflation as the quantity of jobs. Today’s data will reassure the Fed that it will be able to achieve liftoff and raise interest rates, finally, in 2015; there is nothing in the data yet, however, to suggest that the Fed should raise rates sooner or more aggressively than we expect. Our forecast for a third quarter increase in rates holds while the Fed treads as if on thin ice, even as the ground beneath firms in 2015.