The Employment Situation in November – Step Two

Steady payroll gains, a drop in the unemployment rate, decent wage gains. The stage is set for the Federal Reserve to take a second step on the path to monetary policy normalization at the upcoming December meeting.

The Bureau of Labor Statistics (BLS) reported payroll employment rose by 178 thousand in November and revisions to estimates for the prior two months were mixed but subtracted a net 2 thousand. The unemployment rate declined to 4.6% from 4.9% in October, but that was based more on labor force defections (226 thousand) than gains in employment (160 thousand from the household survey). Average hourly earnings slipped for the month but rose 2.5% over the year.

Payroll gains have slowed from prior years but remain robust, averaging 180 thousand per month in 2016. The unemployment rate, despite this month’s dip, has leveled off, hovering around 5%, a number considered by most economists to be full employment in a dynamic, job switching labor market. Similarly, a special unemployment rate (U-6) that is a broader measure of underutilization in the labor market and captures part-time workers who would prefer to work full-time, and marginally attached workers (those who have looked for work in the last 12 months, but not the last 4 weeks) declined in November (9.3%), but has largely leveled off in 2016. At 2.5%, average hourly earnings are down for the month but on par with the monthly average in 2016, and represent steady improvement since the end of the recession.

The combination of declining payroll gains, a level and low unemployment rate, and accelerating earnings growth points to a labor market roughly in balance, and with limited (but not zero) room for additional substantial improvements. This is the labor market the Federal Reserve has been waiting for. Expect an increase in the federal funds rate at the December 13-14 meeting.

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