The US labor market is sending confusing signals.
November brought strong job gains, but unemployment ticked higher, and fewer people are participating in the workforce.
The latest data releases are not so straight-forward and this has left investors, workers, and policymakers scratching their heads.
The Federal Reserve is preparing for a key meeting, and the labor market’s unusual behavior is expected to play a big role in their decision-making.
November’s numbers: good or bad?
In November, US employers added 227,000 jobs, according to the Bureau of Labor Statistics.
That’s a big jump from October’s revised figure of 36,000 and higher than the forecast of 214,000.
Sectors like healthcare (+54,000), leisure and hospitality (+53,000), and government (+33,000) led the charge.
But not all the news was good.
The unemployment rate rose to 4.2% from 4.1%. Labor force participation fell slightly to 62.5%.
The number of people employed dropped by 355,000, while those unemployed increased by 161,000.
Over 40% of unemployed Americans have now been out of work for more than 15 weeks—an unusually high share outside of a recession.
This contradiction is puzzling. Payrolls are growing, but unemployment is also rising.
Workers are leaving the job market, and long-term job seekers are struggling to find work.
Former Fed economist Claudia Sahm compared the situation to the “Twilight Zone,” where things don’t quite add up.
Why aren’t companies hiring faster?
Hiring isn’t keeping pace with the demand for jobs.
Businesses appear reluctant to hire, even as the economy looks strong.
The Job Openings and Labor Turnover Survey (JOLTS) showed 7.7 million open positions in October, down from a peak of 12.2 million in March 2022.
Some industries, like retail, are even cutting jobs. Retail trade shed 28,000 positions in November, just before the holiday season, indicating the change in how companies hire for seasonal work.
Meanwhile, wages are growing steadily.
Average hourly earnings rose 0.4% in November, and over the past year, they’ve increased by 4%.
While higher wages are good for workers, they can also make businesses hesitant to hire more people, especially if they’re worried about future costs.
What the Fed is thinking
The Federal Reserve has been cutting interest rates to keep the economy moving.
Since September, rates have been lowered by 0.75 percentage points.
Another cut of 0.25 points is widely expected at the Fed’s December meeting.
But not everyone at the Fed is convinced more cuts are the right move.
The paradox is that as long as the labour market remains strong, GDP figures will also be revised higher.
In such a scenario, further rate cuts might not exactly be the best move moving forward.
Chicago Fed President Austan Goolsbee recently called the labor market “stable” and suggested rates will likely be much lower a year from now.
However, he hinted that the Fed might slow the pace of cuts if inflation or labor market conditions change.
The Fed is walking a fine line. Inflation has cooled from its 2022 highs, but price growth remains above their 2% target.
At the same time, they don’t want to slow the labor market further, especially with so many people struggling to find work.
What this means for workers and markets
For workers, the current job market is a mixed bag.
While there are still plenty of openings, long-term unemployment is rising, and fewer people are actively participating in the workforce.
For some, this means it’s harder to find the right opportunity, even as businesses are hiring in key sectors.
Investors remain dovish nonetheless.
A slower labor market could mean lower interest rates, which will probably keep pushing stocks to the upside.
Bond yields are likely to fall if rate cuts continue, and the dollar could lose strength.
On the flip side, sectors like healthcare and leisure, which are adding jobs, may see more investor interest.
What’s next?
The labor market’s contradictions are creating challenges for everyone.
Workers face a tough environment, policymakers are weighing their next move, and investors are trying to make sense of it all.
As the Federal Reserve prepares to meet, the mixed signals from November’s jobs data will be front and center.
Although the market is leaning towards another rate cut, the key will be in assessing Jerome Powell’s tone.
Will he appear hawkish or dovish?
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