Job Gains Better Than “Solid”

Another strong report. Nonfarm payrolls increased 266K in November, and upward revisions to October and  September totaled 41K. The October job print had been suppressed by the General Motors strike, and the conclusion of that strike likely boosted the November figure by a very similar amount. The results of the household survey showed the unemployment rate and participation rate each ticking down a tenth in  November, to 3.5% and 63.2%, respectively, reversing one-tenth increases in each in October. 

The trend in job growth looks very robust. Over the last three and six months, monthly job gains have averaged  205K and 196K, respectively. This reinforces the idea that any one-quarter slowing in real GDP growth to a  well-below-trend rate—as has been widely expected for Q4, at least up until fairly recently—should not be seen as indicative of the economy’s trajectory. It also raises the question of whether that trajectory might be stronger than thought entering 2020. It appears that may well be the case. 

In any case, for rate decisions at upcoming FOMC meetings, this has little implication. Our baseline call has been for no further rate cuts (though risks are weighted heavily toward the next move being an easing rather than a tightening), and this reinforces that call. A “material” reassessment of the outlook was already a  difficult threshold to reach. Now it’s somewhat further out of reach. As for rate hikes, they remain firmly off the table. Average hourly earnings advanced a moderate 0.25% in November, from an October level that was marked up somewhat. The 12-month change increased a tenth, to 3.1%. Overheating remains a remote concern, especially with core inflation having come in soft recently. 

The labor market data do complicate a bit the crafting of the statement for next week’s FOMC meeting. In our guess of next week’s statement in our FOMC Briefing, which we put out yesterday, we had them making no changes to the language in the first paragraph, which describes the incoming data. The previous language had seemed to hold up well in all respects. In particular, we had the FOMC continuing to describe the pace  of job gains as “solid, on average, in recent months.” There’s no precise formula that we know of for  determining what is a “solid” versus “strong” pace, but we think the latest data could inspire them to upgrade  that description, likely back to “strong.” 

It’s true that the current three- and six-month average monthly gains don’t look drastically different than they did at the time of the March FOMC meeting (186K and 190K, respectively)—when the FOMC first downgraded to “solid” from “strong” following a poor February jobs report—but they are somewhat higher.  And they’re higher than the corresponding figures in hand at the December 2018 meeting, when the descriptor  was still “strong.” Perhaps most importantly, they are significantly higher than the figures in hand at the last  FOMC meeting. It’s a difference in the incoming data that we think the FOMC will decide warrants a change in the language. Fortunately, the FOMC has already communicated that it welcomes a tight labor market and that stronger-than-expected employment data alone will not push it toward considering raising rates. 

Our updated guess of the December 2019 FOMC Statement: 

Information received since the Federal Open Market Committee met in October September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been strong solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak.  On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2  percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. 

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The Committee continues to view This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the  Committee’s symmetric 2 percent objective as are the most likely outcomes, but uncertainties about this outlook remain. However, uncertainties about this outlook remain, in part because of the implications of global developments, and inflation pressures remain muted. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate. 

In determining the timing and size of future adjustments to the target range for the federal funds rate, the  Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice-Chair; Michelle  W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; and Randal  K. Quarles; and Eric S. Rosengren. . Voting against this action were: Esther L. George and Eric S. Rosengren,  who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.

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