There was a lot of anxious anticipation ahead of the November employment report given this was supposed to provide a cleaner view of the labor market health following a very weak weather-distorted October report. A weak print could have reignited concerns about the labor market resilience while a very strong print would have reignited inflation concerns and reduced the odds of a December Fed cut.
In the event, the report came very close to expectations. The US economy added 227k jobs during November, against a consensus estimate of 200k. All of this should finally settle the case for a Fed cut in December, which had always been our call. There was a 56k upward revision to the prior two months, which left October at a positive 36k versus the initially reported -12k. However, all of the October gain was accounted for by the government sector, with private payrolls still down 2k.
The sector distribution in November skewed slightly weak insofar as retail showed no recovery whatsoever, in fact, job losses intensified in November (-28k). This seems odd given the approaching holiday season and may be sending a cautionary signal about the health of consumer spending. It is too early to say, however, given that early sales data for Black Friday were reportedly strong, so it may be more of a reflection of a shortened shopping season (Thanksgiving was late in November this year). Still, weakness in retail employment warrants monitoring, especially since the November rebound is private payrolls did not in any way alter the downtrend in the pace of hiring. Over the last six months, private payrolls have risen by 108k per month; in the prior six months, that number was 190k. Unmistakable downshift.
This is why, despite a one-tenth drop in the labor force participation rate to 65.5% in November, the unemployment rate ticked up a tenth to 4.2% and was within a hairsbreadth of rounding up to 4.3%. The underemployment rate ticked up a tenth to 7.8%. And both the average (23.7 weeks) and the median (10.5 weeks) duration of unemployment increased noticeably. All of this should finally settle the case for a Fed cut in December, which had always been our call. The market has indeed lifted the odds of a December cut to about 90% (from as low as 50% recently) and is now also pricing higher odds of 3 cuts in 2025 (out view) rather than two.
In a nutshell, the Fed’s dual mandate is what drives the continuing calibration lower in policy rates over the course of 2025 despite less compelling progress on inflation. The pullback in the non-manufacturing ISM, down 3.9 points to 52.1 in November, was another reminder that it is not just about inflation.
Wages were the only element in the jobs report that could have been cited to raise objections to a December cut, but even there the evidence was mixed. Overall average hourly wages increased a brisk 0.4% m/m, keeping the y/y increase at 4.0% y/y, which is probably still a little too high to be consistent with a sustained return to 2.0% inflation. However, average hourly earnings for production and non-supervisory employees, which is a more stable series, increased 0.3% m/m and that measure of wage inflation eased two tenths to 3.9% y/y, the twin lowest level since 2021.
It is not that inflation does not matter anymore. It still matters a lot, especially in light of tariff risks. Indeed, while the Michigan consumer sentiment index showed an encouraging improvement in November, it also showed an uptick in short-term inflation expectations, most likely reflecting tariff concerns. Just as the Fed will be keenly focused on the labor market in 2025, it will be also keenly focused on inflation and inflation expectations. 2025 will truly be a dual mandate year for the Fed!
