The headline nonfarm payroll number was a big miss at 199,000 (vs. 450,000 expected). Seasonal adjustment problems may be partly to blame for the payrolls miss, but we expect the December release will also see upward revisions, as alternative data sources report much stronger job growth last month.
Despite the payrolls miss, the rest of the report points to a hot labor market. Most notably, the unemployment rate dropped by 30 basis points to 3.9 percent, which is just 40 basis points above where the Federal Reserve (Fed) expects unemployment to be in the fourth quarter of 2022. We could reach that level as early as this spring with the possibility of reaching 3 percent by December. The tight labor market will increase wage pressure, making a March increase in the overnight rate more likely.
The drop in the unemployment rate was due to a gain of 651,000 people working in the household survey, while the labor force participation rate was unchanged. The unchanged participation rate will add weight to Fed Chair Powell’s comments that a good portion of the participation shortfall is voluntary at this point, meaning that the labor market may already be at or beyond full employment.
In another sign of how tight the labor market is, average hourly earnings rose 0.6 percent month over month, 20 basis points higher than expected, and November wage growth was also revised up. This wage data corroborate other data we’re seeing on worker bargaining power, with both the quits rate and small business wage plans at record highs. Powell has repeatedly cited strong wage growth as an upside risk to inflation.
One basis point = 0.01 percent.
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