January 08, 2025
The November employment report again gave us a confusing picture, with the establishment survey and household survey going in opposite directions. The establishment survey showed a strong gain of 227,000 jobs. With the upward revisions to the prior two months’ data, this brought the average gain for the last three months to 173,000.
By contrast, the household survey showed a rise in the unemployment rate to 4.2 percent and a drop in employment of 351,000. This continues a downward trend in employment in the household survey, with the year-over-year decline for November at 725,000. The establishment survey shows a gain of 2,274,000 over the same period.
While the surveys are never exactly aligned, this sort of disparity over a long period is extraordinary. Since the start of the pandemic, the establishment survey shows a gain of 6,979,000 jobs, while the household survey shows an increase in employment of just 2,458,000.
The benchmark revision for last year (which will be applied to the January data) will lower job gains in the establishment survey by just over 800,000, but that still leaves a gap of more than 3.7 million. It’s possible that the new population controls in the household survey, which will also be applied to the January data, will further reduce the gap, but it is likely that the gap between the surveys will still be unusually large.
Which Way for the Unemployment Rate?
There are clearly some measurement issues in measuring levels, likely stemming in large part to the post-pandemic surge in immigration, but the ratios are presumably reasonably accurate. The 4.2 percent unemployment rate is still low by historical standards, but the labor market is clearly weaker than a year ago when the rate stood at 3.7 percent. The unemployment rate had risen to 4.0 percent by May but has shown little clear direction since then.
Other measures, such as JOLTS data on job openings and the Indeed data on job postings, still indicate a strong labor market. Both measures are still above their pre-pandemic level, even though they have fallen sharply from the peaks hit in 2022. The data on new and continuing unemployment claims also show weakening but are still consistent with a strong labor market.
Given these other measures, and the strength in the establishment survey, there is little reason to expect a major uptick in the unemployment rate for December.
Prime Age Employment to Population Ratio May Edge Higher
One disturbing item in the November data was a drop of 0.2 percentage points in the prime age (25 to 54) employment-to-population ratio (EPOP) to 80.4 percent. This is down from a peak of 80.9 percent, which was reached at several points, most recently in September. While a drop of 0.5 pp in the prime age EPOP is troubling, we saw a similar decline between July and December of 2023. There is a good chance this is simply driven by measurement error in the household survey.
The drop has been sharper for women than for men, with a decline of 0.8 pp to 74.8 percent, down from an all-time peak of 75.6 percent hit in July. The drop for men was 0.5 pp to 86.1 percent, from a post-pandemic peak of 86.6 percent, which was still 0.1 pp below the pre-pandemic peak.
Jobs, Hours, and Productivity
Given the strong recent job growth, and solid economic data in most categories, we should expect to see job growth of close to 170,000 in December. With the sharp slowing of immigration back in June, and many immigrants fearful of deportation, we should see slower job growth numbers very soon. As noted previously, just prior to the pandemic, the Congressional Budget Office had projected job growth of just 20,000 a month in 2024.
It appears as though we should have another very solid quarter for productivity growth. The index of aggregate hours through November is virtually unchanged from its third quarter average. With self-employment down slightly from the third quarter, the quarter is likely to show very little change in hours. The data through the first two months of the fourth quarter imply GDP growth of more than 3.0 percent, which will translate into productivity growth again above 2.0 percent.
Again, it is worth noting that if the weaker employment growth in the household survey were to prove closer to the mark than the establishment survey, it would mean the uptick in productivity since the pandemic is even larger than the data now show.
Wage Growth Remains Above 4.0 Percent
There was a slight uptick in wage growth over the three months ending in November. The annualized rate of wage growth over the period was 4.5 percent, up from a year-over-year rate of 4.0 percent. A 4.0 percent rate would be roughly 0.5 percent above the rate of nominal wage growth we saw in the two years just before the pandemic. A 4.0 percent rate of wage growth is consistent with a 2.0 percent inflation rate, if productivity growth remains near or above 2.0 percent.
Health Care Likely to Lead Job Growth
The health care sector has consistently been the major source of job growth in the recovery. It added 53,600 jobs in November and has added 679,000 jobs over the last year. State and local governments have also been big job gainers, adding 35,000 jobs last month and 441,000 over the last year. Restaurants have also been a source of steady job growth. They added 28,900 jobs in November, bouncing back from the hurricanes, and have added 158,000 jobs over the last year.
Manufacturing and Construction are Weakening
Manufacturing added 22,000 jobs in November, but this was all due to the end of the Boeing strike. Employment in the sector is 26,000 below the October level and down by 51,000 year-over-year. Construction added 10,000 jobs, after adding just 2,000 in October. With the surge in factory construction coming to an end, job growth in non-residential construction will slow, while high interest rates keep down the pace of housing construction.
While these two highly cyclical sectors are showing some weakness, this is not the sort of collapse we typically see at the onset of a recession.
December Should Provide a Strong Close to a Strong Year for the Job Market
Most of the labor market indicators look like they are going in the right direction, even if it is desirable to have a somewhat lower rate of unemployment. Job growth and wage growth both appear healthy, and productivity is continuing to grow at a rapid pace. The policies advocated by the new administration create a great deal of uncertainty, but the facts on the ground look very good at this point.
