January 04, 2023
The November jobs numbers came in stronger than most economists had expected. There is considerable evidence from regional Fed surveys, unemployment insurance claims, and elsewhere that the labor market is weakening. Nonetheless, the payroll data has been showing strong job growth through the fall. The big question is whether evidence of labor market weakening will show up in the December jobs report.
Will Wage Growth Moderate?
The biggest surprise in the November data was both the strong wage growth reported for the month and also upward revisions to the data for the prior two months. As a result, much of the case for moderating wage growth disappeared. The annual rate for the three months from August to November was 5.1 percent. This is somewhat below the 6 percent peak for three-month periods, hit at the end of the 2021, but certainly well above a pace that is consistent with the Fed’s 2 percent inflation target.
The regional Fed surveys, along with private indexes, notably Indeed’s wage measure for new hires , suggest that wage growth is moderating. That should mean that December will show slower wage growth in the average hourly wage, but the evidence also pointed to slower wage growth in November, which was not borne out by the report.
It will also be important to look at the revisions to prior months’ data. We have seen several substantial revisions to wage data this year, most of them showing wage growth that was higher than previously reported. There was an unusually low initial response rate to the November survey, which could leave room for large revisions. This applies to job growth numbers as well.
Slower Job Gains
Job growth has clearly slowed from the extraordinary pace being reported earlier this year, but the 263,000 jobs number reported for November is almost certainly faster than can be sustained in an economy that is near full employment. Various surveys of managers, along with a modest rise in continuing unemployment insurance claims, suggest that hiring has slowed. We should expect a number closer to 150,000 for December, which will be in the ballpark of what can be sustained going forward. It will also be important to see if the prior two months’ numbers are revised to any substantial extent.
Hours Worked
The index of aggregate weekly hours fell by 0.2 percent in November, as a reduction in the length of the average workweek more than offset the increase in payroll employment. It is important to look at hours for three reasons.
First, total hours worked is a key measure of labor demand. If total hours fall, even as employment rises, it indicates that demand for labor is weakening. Monthly data are erratic and subject to revision, but if we see a clear pattern where total hours worked is stagnating, we can infer that labor demand has leveled off.
The second issue is that companies increased the length of the average workweek in response to a situation where they could not hire more workers. If we see the workweek get shorter again, or even stay at its current level, 34.4 hours, we can infer that companies are no longer having serious problems hiring workers.
Finally, hours worked is the denominator for the productivity calculation. Reported productivity crashed in the first half of the year, presumably due to supply chain problems and labor turnover. It returned to a respectable positive pace in the third quarter. With growth again looking to be a modest positive figure in the fourth quarter, slow growth in hours worked would imply strong productivity growth. This would be a major factor slowing inflation.
Gap Between Establishment Survey and Household Survey
The already huge gap between job growth in the establishment survey and employment growth in the household survey got even larger in November, as the household survey showed a drop in employment of 138,000. The job growth in the establishment survey seems more consistent with other economic data than the household survey, which has shown an increase in employment of just 12,000 since March.
It seems likely that the picture in the household survey will be more positive when the population controls are adjusted with the January data, but we may see some reduction in the gap with the December data. It is worth noting that if the household survey proves to be closer to the mark, recent productivity growth has been far better than the current numbers indicate.
Unemployment Due to Job Leavers
After hitting an all-time high in September, the percentage of unemployment due to people voluntarily quitting their jobs has fallen sharply in the last two months. It stood at 13.9 percent in November, a level still consistent with a healthy labor market, but well below peaks seen in prior periods with strong labor markets. This is a measure of workers’ confidence in their ability to find jobs, since it means they quit their current job before having another one lined up. The number is erratic, so it could bounce back up in December, but if it remains near its November rate or falls lower, it will be another indication that the labor market has weakened.
Hiring in Lower Paying Sectors
Employment in sectors like child care and nursing homes is still below pre-pandemic levels. In a tight labor market, employers in these sectors don’t have the resources to compete with other employers. In recent months we have seen modest job growth in these sectors. That is likely to continue in December.
State and local governments are also among the sectors having trouble attracting workers. While jobs in state government have pretty much recovered to pre-pandemic levels (education employment is somewhat higher, non-education is still 52,400 lower), local employment is still far below pre-pandemic levels. Jobs in local education are down by 270,700 and non-education jobs are down by 174,000. We have seen strong job growth at the local level in the last two months, with employment rising by 63,000. It may continue into December.
Jobs in Cyclical Sensitive Sectors
Historically construction and manufacturing have taken the hardest hits in recessions. These sectors have continued to add jobs, even as the Fed has raised rates sharply. There may be at least a slowing of growth, if not an actual decline in December.
Weaker but Still Healthy Labor Market
It is likely that the December report will still show a strong labor market, but one that looks more normal than what we saw earlier in 2022. This is what the Fed is shooting for.
