The November Employment Head Fake

By:  Thomas Steffanci, PhD, Senior Portfolio Manager

The print of the monthly payroll employment number brings Wall Street cheers or anguish, filling the market airwaves with new prognostications of economic growth or stagnation. The November release was a clear example of such harrumphing.

According to the Labor Department, employment rose by just 210,000, far below the consensus of a 545,000 gain. The S&P 500 fell 1.2% and 10 bond yield fell 9 basis points to 1.33% on Friday, the lowest close for bond yields since late September. The word was the Federal Reserve may have to go slower in withdrawing their bond buying because employment is stagnating. There was some truth to the tale, however. The three-month average of monthly payroll employment gains slipped from 845,000 to 378,000, implying a labor market slowdown.

But under the hood, things appear much better, and the labor market seems to be doing just fine. First off, the unemployment rate fell from 4.6% to 4.2%. And the reason is that household employment is based on a monthly survey of the same 60,000 households which rose by 1.1 million workers. And it is the household employment measure that is used to calculate the unemployment rate, not the establishment survey that gets all the attention. Along with that increase, the labor force added 594,000 workers. That means that new entrants into the workforce were able to find jobs easily. Since unemployment is measured as a percent of the labor force, typically if employment gains are less than labor force growth, the unemployment rate rises. Not so in November.

But there is more. The labor force participation rate (the percent of the working age population looking for work and thereby in the labor force) rose to 61.8%, climbing out of the range it had been in since mid-2020. This is important because it shows that workers that have laid back looking for work for various reasons like federal and state unemployment assistance, are now willing and able to be employed.

While the markets viewed the November report as a sign of slackening in employment, more robust measures suggest otherwise. Along with the labor force participation rate, weekly initial claims for unemployment insurance have declined sharply over the past two months, from 364000 to 222,000, a 39% reduction, bolstering the message of continuing momentum on the job front.

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