Wells Fargo Reports Jobs: Solid Gain Supports Consumer and FOMC Move

 

Job Gains Support FOMC Move

Nonfarm payrolls rose 178,000 in November. Job growth has averaged 176,000 over the past three months, with private sector payrolls up an average of 165,000 amid strength in the service sector, especially professional & business services (top chart). These gains are consistent with solid consumer spending and continued economic growth. Aggregate hours worked are up a healthy 2.7 percent annualized over the past three months.

The unemployment rate declined to 4.6 percent as the labor force participation rate once again slid. On balance, these results remain within the FOMC’s range for full employment and indicate the labor market continues to tighten. The U-6 unemployment rate, a focus of President- elect Donald Trump, declined to 9.3 percent, marking a new cycle low.

In contrast, manufacturing payrolls were down 4,000 in November. The distinction between nondurables (up over the past year) and durables (down over the same period) persists. The factory sector continues to face the usual headwinds, including a strong dollar and sluggish growth abroad, but recent data suggest manufacturing has begun to firm, which should bode well for payrolls in this sector going forward. Construction jobs rose 19,000 in November and these gains are consistent with improvement in housing and nonresidential construction.

Wage Growth Soft in November, Real Wages Up Over the Year

Average hourly earnings disappointed in November, declining 0.1 percent. Earnings are still up 2.5 percent over the past year and add to the evidence of a tightening labor market. Wage gains remain widespread across industries (middle chart). Over the past year, wage gains of 2.5 percent exceeded the rise in the Consumer Price Index of 1.6 percent, thereby resulting in real wage gains and providing support for improved consumer spending. Wages in sectors such as leisure & hospitality, information and construction have recorded strong gains over the past year.

Unit Labor Costs and Profits as the Business Cycle Ages

Rising labor compensation in the face of small gains in labor productivity gives rise to higher unit labor costs and profit pressures in an aging business cycle. A tighter labor market should prompt a continued strengthening in wage growth now that we are in the range of full employment, and this is what we have witnessed over the past year. Given the absence of a pickup in productivity growth, rising unit labor costs will force companies to either accept lower profit margins or pass the costs onto consumers through higher prices. A combination of the two is typical, with profit growth slowing and inflation rising when the economy reached full employment in previous cycles (bottom chart). A third door remains open if the economy can pick up the pace of growth—we shall see.