November Employment Report and Non-Manufacturing Activity

KEY DATA:  Payrolls: +210,000; Private: +235,000; Retail: -20,000; Revisions: +82,000/ Unemployment Rate: 4.2% (down from 4.6%); Wages: +0.3%; Over-Year: +4.8%/ ISM (NonMan.): +2.4 points; New Orders: 0%

IN A NUTSHELL: “In this labor shortage environment, it is unrealistic to expect hiring in the half-million range every month, so don’t look at this report as being disappointing.”

WHAT IT MEANS:  Is the job market losing steam?  Absolutely not.  Yes, the number of people added to the payrolls in November was less than expected.  But it really should not have been a major surprise that hiring underperformed because there are labor shortages across the economy.  Look at the weakest sectors.  Retail cut employment.  Who wants to work in retail these days?  Health care hiring was soft.  Anyone know of an unemployed nurse?  Education is having a tough time finding workers, so why should we expect hiring to be strong?  And let’s not forget that these data are volatile.  They bounce around like crazy.  Yet the private sector added an average of 429,000 workers over the past three months.  That is awesome.  Revisions to the September and October added an additional 82,000 workers.  That usually means small and mid-sized firm are adding more workers than the models project, as their data come in later.  In other words, on the hiring front, conditions are still really good.

As for the unemployment situation, the sharp decline in the rate came despite a solid rise in the labor force and an increase in the participation rate.  That shows that demand is robust.  And workers are benefitting, as wages rose, though somewhat less than they had been. 

The Institute for Supply Management released its report on the nonmanufacturing sector and activity and hiring improved solidly in November.  Orders didn’t accelerate, though they remained at a strong pace.  The cost of inputs continued to weigh on firms, as no industry reported a decline in prices paid and fewer than one percent of the respondents said their costs fell.  Overall, the nation’s supply managers are saying both the manufacturing and nonmanufacturing portions of the economy are in very good shape. 

IMPLICATIONS:While worker demand is strong, labor supply is tight, a combination that economists seem to forget when they make up their monthly guesses of job growth.  This month was no different.  Forecasts were for 600,000 or more jobs to be added, which would have been nice.  But it would likely have been unrealistic.  Indeed, I believe the three-month average of over 400,000 is unsustainable.  Job gains in the 200,000 to 300,000 look more likely, and that pace should slow further as we move through 2022.  That doesn’t mean the economy will be weakening.  It’s just that there are not a lot of workers sitting around waiting for the perfect job offer.  Yes, the participation rate is below where it was before the pandemic hit, but that was almost two years ago.  The rate had peaked in March 2000 and trended steadily downward for nearly twenty years.  The sustained expansion after the Great Recession scraped the barrel clean and there was a rise in the rate for a few years.  But most labor market experts had predicted that the participation rate would stabilize or fall further, as boomer retirement rates accelerated.  So, we really are not that below where we might have been if the pandemic didn’t hit.  In other words, there is not a reserve army of the unemployed waiting for the right time to surge into the market.  That is the constraining factor, and the strong job increases we have seen are the result of technology being such that the job market friction has been reduced both in terms of information as well as location.  What is left is the skill mismatch, which cannot easily be resolved and that will keep job growth limited, as we are likely at full employment already.  The implication is that we should start setting our targets to more realistic levels and while we will get some really good job numbers over the next six to twelve months, we will likely trend back to a sustainable, full employment level of somewhere between 175,000 and 225,000 per month.