Non-farm payrolls report "enough" for quicker Fed taper

Summary: Non-farm payrolls increase by 210K in November; considerably less than 500K expected; previous two months’ figures revised up by 82K; jobless rate down to 4.2%, participation rate rises to 61.8%; points to “rapid tightening” in US jobs market & accelerated Fed taper; jobs-to-population ratio increases to 59.2%; underutilisation rate falls from 8.3% to 7.8%; annual hourly pay growth steady at 4.9%.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been generally more modest but usually well above the long-term monthly average.

According to the US Bureau of Labor Statistics, the US economy created an additional 210,000 jobs in the non-farm sector in November. The increase was considerably less than the 500,000 which had been generally expected earlier in the week as well as the 546,000 jobs which had been added in October after revisions. However, employment figures for September and October were also revised up by a total of 82,000.

The total number of unemployed decreased by 542,000 to 6.877 million while the total number of people who are either employed or looking for work increased by 594,000 to 162.052 million. These changes led to a fall in the US unemployment rate from October’s 4.6% to 4.2%. The participation rate increased from October’s rate of 61.6% to 61.8%.

ANZ economist Hayden Dimes said, “Despite the downside miss on November non-farm payroll jobs, the large 0.4% fall in the unemployment rate to 4.2% is pointing to a rapid tightening in the US labour market.” NAB senior economist Tapas Strickland said the “drop in the unemployment rate is enough for an accelerated taper.”

Longer-term US Treasury yields fell noticeably on the day as investors sought low-risk assets. By the close of business, the 10-year yield had shed 9bps to 1.36% and the 30-year yield had lost 8bps to 1.68%. The 2-year yield finished 3bps lower at 0.59%.

One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. November’s reading increased from 58.8% to 59.2%, still some way from its April 2000 peak reading of 64.7%.

Wage growth spiked in the US during the early stages of pandemic restrictions as lower-paid jobs disappeared at a faster rate relative to higher-paid jobs, disrupting the usual relationship between wage inflation and unemployment rates. Normally, wages tend to grow as the supply of labour tightens.

One measure of tightness in the labour market is the underutilisation rate. In November, this measure fell from 8.3% to 7.8%. Hourly pay growth over the previous 12 months remained unchanged from October’s revised rate of 4.9%.

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