The U.S. gained 263,000 jobs last month. It's good news for workers, but not the Fed
The Labor Department' monthly job report released on Friday brought good news for workers, but likely created a Maalox moment for Federal Reserve officials trying to get inflation under control.
The report showed that hiring slowed only slightly in November, with employers adding 263,000 jobs last month, compared to 284,000 jobs in October. The unemployment rate held steady, at a low 3.7%.
The Federal Reserve has been looking for weakness in the resilient labor market, which would help slow down inflation. That, in turn, would give the central bank a reason to pull back on the throttle of raising interest rates. In less than a year the Fed has pushed its benchmark borrowing rate from near zero to almost 4%. Friday's strong report likely roiled many of the central bankers' stomachs.
"The labor market remains far too hot for the Fed's liking," Wells Fargo economists Sarah House and Michael Pugliese wrote in a research note.
All three major indices sank when the stock market opened on Friday, with investors fearing that the Federal Reserve would respond to the strong jobs report with even more aggressive interest rate hikes.
But the markets mostly recovered over the course of the day, and the indices ended essentially flat with where they had started, with the Dow Jones Industrial Average up 0.1%. The S&P 500 fell 0.12% and the Nasdaq 0.18%. All three were up for the week, with the Nasdaq rising the most, 2.11%.
Competition for workers pushes up wages, which could stoke inflation
Competition for workers has been pushing wages up at a rapid rate, and the Federal Reserve is worried that could add to already high inflation, especially in the services sector where wages are one of employers' biggest costs.
Average wages in November were 5.1% higher than a year ago — a larger annual increase than the month before.
"The Fed has essentially said that they need to see a cooler job market to help reduce those inflationary pressures," Wells Fargo's House said.
The central bank has been raising interest rates aggressively in an effort to tamp down demand and bring prices under control. The rate has seen the fastest pace of increases in decades, and it's likely to go even higher later this month.
Rising interest rates have cooled demand for workers, but Fed chairman Jerome Powell said this week there's still a long way to go.
"Demand for workers far exceeds the supply of available workers," Powell said Wednesday. "Thus, another condition that we're looking for is the restoration of balance between supply and demand in the labor market."
While the number of job openings has declined slightly, Powell noted there are still about 1.7 unfilled jobs for every unemployed worker.
Construction, manufacturing added jobs in November
Ordinarily, the Fed's rate hikes would be felt most acutely in interest-sensitive industries such as construction and manufacturing. But construction companies added 20,000 jobs in November while factories added 14,000.
There are some signs of a slowdown. Home sales and construction have dropped significantly. And manufacturing activity declined in November for the first time since the beginning of the pandemic, according to a survey of factory managers released on Thursday.
"We went, what, 29 months in expansion mode, but we came down pretty quickly, primarily driven, I think, by the interest rate environment," said Tim Fiore, who oversees the survey for the Institute for Supply Management.
As new orders for manufactured goods declined in recent months, some factory managers stopped filling vacant jobs and others resorted to layoffs. But overall employment in the sector has been resilient.
"I think this is still a soft contraction," Fiore said. "I'm really hopeful that some amount of demand will come back. There's still pretty robust production plans for 2023."
Friday's report did show some job cuts. Retailers shed 30,000 jobs and warehouses and transportation companies cut 15,000.
High-profile tech companies like Twitter have also announced job cuts, but so far there's been little sign of widespread layoffs. New claims for unemployment benefits remain at historically low levels.
"Despite a smattering of news headlines on corporate announcements of layoffs, the four-week moving average of initial jobless claims is still lower now than it was over the summer," said Nela Richardson, chief economist at the payroll processing company ADP.
The number of people available to work has stayed low, and that's a problem
One reason the labor market is so tight is that while jobs rebounded quickly from the pandemic recession, the workforce has not. The labor force actually shrank in November by 186,000 people.
Early retirements, limited immigration, and COVID-related deaths may have kept the number of available workers in check, Powell said. And there's little evidence that's going to change any time soon.
"I think what the Fed has learned is that they can't count on a rebound in labor supply," House said.
Instead, the central bank will continue to push interest rates higher, in an effort to curb inflation and bring prices under control.
Powell acknowledged that may result in somewhat higher unemployment. But he argued the alternative of letting prices soar unchecked would be worse.
"Right now, people's wages are being eaten up by inflation," Powell said Wednesday. "If you want to have [a] sustainable, strong labor market, where real wages are going up right across the wage spectrum, especially for people at the lower end, you've got to have price stability."
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Transcript
RACHEL MARTIN, HOST:
Hiring in the U.S. slowed only slightly last month as rising interest rates weighed on businesses. The overall job market remains unusually tight. The Labor Department reported this morning that U.S. employers added 263,000 jobs in November. The unemployment rate held steady at a low. The unemployment rate held steady at a low 3.7%. NPR's Scott Horsley is with us with details. Hey, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Rachel.
MARTIN: So this report showed stronger job gains than forecasters had expected, even though the Fed has been battling inflation with higher interest rates. What's going on?
HORSLEY: The job market has just been really resilient. It has been chugging along, adding jobs at a very consistent rate for the last several months. That's good news for workers and anybody looking for work. But it is a bit of a Maalox moment for the Federal Reserve, which has been trying to cool off the job market with those higher interest rates. You know, the Fed is worried that wages have been climbing at a rapid rate as employers compete for scarce workers. Average wages in November were up more than 5% from a year ago. And Wells Fargo economist Sarah House says the Fed is concerned that could push already high consumer prices even higher.
SARAH HOUSE: The Fed has essentially said that they need to see a cooler jobs market to help reduce those inflationary pressures.
HORSLEY: So the Fed's been pushing up interest rates at the fastest pace in decades, but so far it's just not putting much of a dent in the job market.
MARTIN: Which jobs are most affected by these actions from the Fed?
HORSLEY: You know, you'd expect to see the impact in construction jobs and manufacturing jobs, for example. Those are industries that are particularly sensitive to rising interest rates. But construction companies added 20,000 jobs in November. Factories added 14,000. Now, there are some signs that those businesses are feeling the effect of higher borrowing costs. A survey this week showed factory activity in November declined for the first time since the very early days of the pandemic. As factory orders have slowed down, some managers have stopped filling job vacancies. Some even report laying off workers. But on balance, the factory sector is still adding jobs. Tim Fiore, who oversees that survey for the Institute for Supply Management, says he doesn't think the sky is falling.
TIM FIORE: I think this is still a soft contraction. I'm really hopeful that some amount of demand will come back. There's still pretty robust production plans for 2023.
HORSLEY: Today's report did show some job cuts in retail and in warehousing. But as we look more broadly around the economy, we're just not seeing evidence of widespread layoffs. New claims for unemployment benefits, for example, are still at historically low levels.
MARTIN: I know the Fed is worried about inflation, but Scott, it's also supposed to promote full employment in this country. So why is the central bank deliberately pouring cold water on the job market?
HORSLEY: Yeah. At one point the Fed was hoping the job market would cool off by itself, but that just hasn't happened. And part of the problem is that while jobs have rebounded really quickly, the workers needed to fill those jobs have not. The labor force actually shrank last month by 186,000 people. So the Fed's having to restore balance the hard way by tamping down demand. Now, Fed Chairman Jerome Powell acknowledged this week that could result in somewhat higher unemployment. But he says the alternative of letting wages and prices climb unchecked would be worse.
JEROME POWELL: Right now, people's wages are being eaten up by inflation. If you want to have a sustainable, strong labor market where real wages are going up right across the wage spectrum, especially for people at the lower end, you've got to have price stability.
HORSLEY: Now, so long as unemployment stays low, people are going to cut the Fed some slack. But if unemployment changes, that could change.
MARTIN: NPR's Scott Horsley, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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