Wage Growth and Job Gains Amid Rising Unemployment
Weekly Economic Review: December 6, 2024
Mixed Signals Before the Fed’s December Meeting: Strong Wage Growth and Job Creation
Contrast With A Rising Unemployment Rate and Declining Labor Force Participation.
Last week saw the release of two market-moving economic data points: job openings on Tuesday and job creation and employment situation on Friday. Job openings increased in October, while layoffs decreased to the lowest level since June, suggesting that demand for workers is rebounding. Workers who voluntarily quit their jobs increased to the highest level since May, indicating greater confidence in their ability to find new employment. New jobs created by businesses solidly recovered in November from the prior month, which was severely affected by hurricanes and strikes. Job creation for October and September was also revised higher, suggesting that the underlying labor market remains solid. However, the unemployment rate rose, with a continued drop in household employment for the last two months. Hourly earnings did not increase on a monthly or annual basis, but still came in higher than expected.
Let’s examine in more detail the Job Openings and Labor Turnover (JOLTS), and job creation and employment situation announced last week.
JOLTS: The Bureau of Labor Statistics (BLS) announced that the number of job openings increased by 372,000 in October, to 7.74 million from a downwardly revised 7.37 million (originally 7.44 million) in September. This was higher than the market expectation of 7.52 million, although down by 941,000 from a year ago. The monthly increase was mainly driven by gains in professional and business services (209,000), food services and accommodation (162,000), and information (87,000), partially offset by a decrease in state and local government (26,000). The South posted a significant rebound in job openings of 486,000 as it recovered from the recent severe hurricanes. Job vacancies in the West also rose by 133,000, while the Northeast and Midwest declined by 195,000 and 52,000, respectively.
The ratio of openings to unemployed people remained unchanged at 1.1, the lowest level since May 2021. The number of hires decreased by 269,000 to 5.31 million in October, lower than September’s hires, which advanced by 147,000 to 5.58 million. The decrease in October hires was mainly driven by leisure and hospitality and professional and business services. All four regions posted declines in hires for October.
Layoffs decreased by 169,000 to 1.63 million after advancing by 134,000 to 1.80 million in September. The decrease in layoffs was centered in leisure and hospitality, construction, and manufacturing. All regions except the West posted declines in layoffs.
The number of people who voluntarily resigned increased by 228,000 to 3.33 million in October after declining by 80,000 in September to 3.10 million. The quits rate, the rate at which workers voluntarily leave their jobs, excluding retirements, went up to 2.1% in October from 1.9% in September. This indicates that workers are more confident in their ability to find a new job than they were in the past.
Job Creation and Employment Situation: The BLS announced that businesses created 227,000 new jobs in November, slightly higher than the expected 220,000 gain. The November increase was primarily driven by gains in health care (54,000), leisure and hospitality (53,000), government (33,000), and transportation equipment manufacturing (32,000), partially offset by a loss in retail trade (28,000). This retail trade decline is in part attributable to a late Thanksgiving and Black Friday this year. Additionally, the September job creation number was revised up by 32,000 from 223,000 to 255,000, and the job creation number for October was revised up by 24,000 from 12,000 to 36,000. As a result, the three-month average of monthly job growth, which smooths out monthly volatility, was 173,000, a significant in-crease from 123,000 in October.
The unemployment rate rose to 4.2% in November, higher than both October’s 4.1% figure and the market’s 4.1% expectation. The number of job losers (or layoffs) was 3.41 million, a slight in-crease of 7,000 from the prior month. The rise was mainly driven by an increase of 73,000 in permanent layoffs, partially offset by a decline of 66,000 in temporary layoffs. Furthermore, job leavers, defined by the BLS as unemployed people who voluntarily quit their jobs and immediately started looking for new employment, increased by 52,000 to 853,000 in November, after declining to 801,000 in October. Temporary help services employment, a leading indicator of the labor mar-ket trend, was 2.65 million in November. This ticked up slightly from the prior month but is lower than the pre-pandemic level of 2.9 million and has continued to trend down from its peak at 3.18 million in March 2022.
The labor-force participation rate (the percentage of working-age people who are employed or are actively looking for work) was 62.5%, down slightly from 62.6% in October and lower than the market expectation of 62.7%. The number of people working part-time for economic reasons, rep-resenting individuals who would have preferred full-time employment but were working part-time because their hours had been reduced or they were unable to find full-time jobs, decreased by 100,000 to 4.46 million in November following a decline of 67,000 in October. Wage growth (aver-age hourly earnings) rose 0.4% in November after advancing at the same rate in October, coming in slightly higher than the expected 0.3%. On an annual basis, wages increased by 4.0%, un-changed from October but higher than the market expectation of 3.9%.
On a concluding note,the labor market data released last week presents a mixed picture. Job openings came in higher than expected, posting a gain of 371,000 in October after significantly declining by 489,000 in Sep-tember. New jobs created in November increased significantly, by 227,000, and the prior two months’ figures were also revised up. These, along with the three-month average job growth of 173,000 and the higher-than-expected wage growth, evidenced resilient labor demand. Taken alone, the labor market data would argue against an interest rate reduction at this time. However, the unemployment rate rose to 4.2% with declines in household employment, labor force, and labor force participation rate. The three-digit unemployment rate is 4.246%, which is 0.004 percent-age points short of rounding up to 4.3%. The unemployment numbers lend support to a possible December rate cut. It appears that the market is putting more weight on the weaker-than-expected unemployment data than the job creation data, as the new job figures for the last two months were significantly distorted by hurricanes and strikes. As such, the probability of a rate cut for the FMOC’s December 18 meeting went up to 85% last Friday from 65% a week earlier. How-ever, given the persistent inflation shown by the recent underlying inflation data, the November CPI report scheduled to be released on December 11 will be critical for the Fed’s decision on December 18.
The 2-year and 10-year Treasuries ended at 4.10% and 4.15%, respectively. These rates were down by 3 basis points compared to a week ago. However, because of the increased rate cut expectation, all rates on the short-end curve (i.e., less than 2-year maturity, which are sensitive to Fed rate cut expectations) were down significantly, most notably a 19-basis point decline for one and two-month maturities and a 16-basis point decline in the 3-month maturity.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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