The unemployment rate reached 4.6% today! Nevertheless, the Federal Reserve perceives current conditions as stable, allowing for a policy stance slightly above neutral since labor market deterioration has not yet occurred.
Since late 2022, I have consistently argued that the Fed shifted its approach to maintaining a more restrictive policy throughout this cycle. I have emphasized that, regardless of fluctuations in labor data, the Fed will maintain its restrictive stance until jobless claims rise significantly. Specifically, a break in jobless claims would be indicated by the four-week moving average approaching 323,000.
I maintain that the Federal Reserve’s primary objective has been to suppress wage growth. With wage growth now at cycle lows, the institution is nearing its policy targets. Wage growth is trending toward 3%, while productivity, they believe, is really running at 1%. These conditions are conducive to achieving their 2% inflation target. With this context in mind, let’s examine the latest report.
From BLS: “Total nonfarm payroll employment changed little in November (+64,000) and has shown little net change since April, the U.S. Bureau of Labor Statistics reported today. In November, the unemployment rate, at 4.6 percent, was little changed from September’s 4.5 percent. Employment rose in health care and construction in November, while the federal government continued to lose jobs.”
October’s employment figures were notably volatile, so I interpret the reported decline of 105,000 jobs with caution. Over the past six months, job creation has averaged only 17,000 per month, and for the year, 55,000 per month — levels not seen in this century outside of a recession. Excluding the healthcare sector, recent job growth has been negligible.
Below is the monthly breakdown of jobs created and lost.
I contend that the Federal Reserve is likely comfortable with an unemployment rate as high as 5%, provided jobless claims do not increase substantially. While a 4.6% rate may concern the general public, the Federal Reserve’s communications indicate a lack of immediate concern.
Although manufacturing employment is not experiencing a sharp decline, the sector has been shedding jobs for several consecutive months.
Specialty contract construction employment continues to decline.
Residential construction employment has remained resilient, even in light of negative revisions to some jobs reports this year. This labor data pool has been key to my economic cycle work as this sector traditionally breaks before a recession starts.
In this context, builder confidence has increased over the past several months.
Conclusion
The labor market is softening more noticeably now, but it’s not breaking according to the Fed! I know it seems wild to many people, but this is who they are, and I can make a case that they’re fine with wage growth falling and the unemployment rate rising. If they want to get back toward 2% inflation, they need to see more pain, so if jobless claims were breaking higher, then they would fold. That hasn’t happened yet.
English (US) · 