Cooling in U.S. Labor Market Arrives a Bit Earlier Than Expected

(Bloomberg) -- The U.S. labor market moderated somewhat in November, a development economists have been preparing for -- though maybe not this soon.

While job gains of 155,000 missed all forecasts, and the prior month’s reading was revised down, the figures are still consistent with solid economic growth. At the same time, wages which rose less than expected on a monthly basis, aren’t yet running away to a level that would encourage the Federal Reserve to raise interest rates at a more aggressive pace.

The key question is whether the labor market is merely settling back after robust gains or is about to deteriorate further. A separate report Friday showed consumer sentiment about the future was the weakest this year, as opinions turned negative on the unemployment rate for the first time since mid-2017. The jobless rate in November held at the lowest since 1969.

Cooling in U.S. Labor Market Arrives a Bit Earlier Than Expected

Some cooling was expected eventually, as other indicators point to a softer economy in 2019, after $1.5 trillion in tax cuts and a government-spending boost juiced the data earlier this year. For now, the jobs report showed that the labor market is so far holding up amid the dissipation of tailwinds and emergence of headwinds including President Donald Trump’s trade war with China.

“It’s still pretty broad-based strong hiring,” Julia Coronado, founder and president of MacroPolicy Perspectives LLC, said in a Bloomberg Television interview. Still, the wage figure “kind of confirms what we’re hearing from the Fed, that the inflationary pressures that they had maybe expected to be building at this point in the cycle aren’t that strong, and so that sort of supports the case for stretching out rate hikes in 2019,” Coronado said.

U.S. stocks resumed their decline Friday, while Treasuries fluctuated, as the Trump administration pressed its trade war with China and the jobs data added to concern that growth has peaked.

“It’s not like 155,000 is a terrible number, but it’s below what people were looking for,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. After an unusually strong two quarters for the economy, “we’re looking for growth to step down this quarter and you should probably also expect to see the labor market cool off some. It’s consistent with the economy coming off what people call a sugar rush.”

What Our Economists Say...

The November jobs report drew a picture of solid job growth into year-end despite a downward surprise to headline payrolls. The report provides clues into labor-market dynamics going into 2019, with certain pockets of weakness developing -- particularly in the rate-sensitive sectors of the economy.

-- Yelena Shulyatyeva, Tim Mahedy and Carl Riccadonna, Bloomberg Economics

Read more for the full note.

For the Fed’s interest-rate hikes, “December is pretty close to a done deal,” Feroli said. “For next year, it depends what the data looks like the next couple of months. It doesn’t feel like things are softening in an alarming way. If it’s really soft, they’ll take a break.”

Fed Chairman Jerome Powell said late Thursday that the U.S. labor market is “very strong” by many measures and that the economy is “performing very well overall.” Companies earlier this year increased investment amid tax cuts and robust consumer demand for goods and services, with average payroll gains this year outpacing those in 2016 and 2017.

Even so, one key risk is the trade war between the U.S. and China, the world’s two largest economies. While the nations agreed last weekend on a 90-day pause for new tariffs, the accumulated levies and developments have created uncertainty for companies and may weigh on the employment outlook.

In November, retailers showed solid demand for workers overall, hiring 18,200 people in the month before Christmas; general-merchandise stores added the most employees while clothing and electronics stores cut workers.

Yet construction jobs rose by 5,000, the weakest since a decline in March, as gains cooled among residential specialty trade contractors. Manufacturing remained strong at an increase of 27,000.

The monthly gain in average hourly earnings for all private workers followed a downwardly revised 0.1 percent increase. The annual increase topped 3 percent for a second month, reflecting how companies are steadily raising pay to attract and retain workers as worker availability tightens. The gains probably still aren’t fast enough, though, to spur concerns of runaway inflation among Fed officials.

“The underlying details show it’s still a very tight labor market,” said Thomas Simons, an economist at Jefferies LLC in New York. “It’s still hard for employers to find the workers they need. We’re still seeing new entrants to the job market.”

©2018 Bloomberg L.P.