Payrolls Beat Expectations, but Signs of Moderation on the Horizon
Fed Chair Powell’s speech at the Brookings Institute on Wednesday was the focus of attention during a week replete with economic data. As we write in the Interest Rate Watch, Chair Powell hinted that the magnitude of rate hikes moving forward could be smaller than the string of 75 bps hikes implemented over the previous four FOMC meetings. While Chair Powell’s speech was slightly out of line with market expectations, it was in-line with our current macroeconomic forecast.
One of the reasons why we believe the Fed will turn slightly less aggressive in the months ahead is that inflation, while still uncomfortably hot, no longer appears to be intensifying. Similar to October’s core CPI print, the core PCE deflator rose 0.2% in October, a softer-than-expected increase. Several underlying drivers of inflation also look to be rolling over. For example, the prices paid component of the ISM manufacturing index during November fell to the lowest level since May 2020, suggesting manufacturing input costs are declining outright.
That said, the labor market remains strong, which is a reason why the Fed will want to continue raising rates. Total nonfarm payrolls rose by 263K in November. The gain represents a moderation from the robust pace seen at the start of the year, but still quite strong by historical standards. Nonfarm payroll growth has averaged 272K per month over the past three months, stronger than the average monthly gain of roughly 190K that was registered during the last economic expansion. The unemployment rate was unchanged at 3.7%, while average hourly earnings surprised to the upside and rose 0.6% during the month. Household employment, which is highly volatile and generally viewed as a somewhat less reliable estimate of hiring compared to the payroll number, dropped by 138K, the second straight monthly decline.
The modest downshift in job growth relative to earlier this year is not the only indication of labor market moderation. Reported earlier this week, the Job Openings and Labor Turnover Survey (JOLTS) for October revealed that job openings fell to 10.3 million from 10.7 million the month prior. Job openings remain highly elevated, but have trended lower since peaking in March. One factor that may be contributing to the fall in openings is that the number of quits has now declined in six of the past seven months. The number of job openings per unemployed, a measure of labor market tightness frequently cited by Chair Powell, fell to 1.71 from 1.86 in September, continuing the slide that began in April.
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