The US labor market may be shifting from “not so good” to “terrible”. Unfortunately, due to a series of political farces by Washington politicians, we are still mired in a fog of data, so a more precise diagnosis will probably have to wait for some time.
The latest data shows that the unemployment rate rose to 4.6% in November, up from 4.4% in September (the last time the figure was released) and above the recent low of 4% in January. On the surface, the increase in this most important and comprehensive labor market statistic is worrying and seems to call for further interest rate cuts by the Federal Reserve. However, futures markets currently suggest a roughly one-in-four chance of a rate cut in January, little changed from Monday, indicating that investors are reacting differently to this.
Apart from the unemployment rate, there are other worrying reasons. Due to the government’s efficiency department’s implementation of the deferred resignation plan, the number of non-farm employees fluctuated sharply, decreasing by 105,000 in October and increasing by 64,000 in November. Even after excluding this one-off factor, there is hardly any reason to be optimistic from the specific data. Among the 11 major industry categories, only the leisure and hospitality industry, education and healthcare services, and construction industry saw employment growth in the past three months. The growth in the construction industry was also attributed to the booming development of artificial intelligence data centers. The manufacturing industry, information industry, and trade, transportation, and utilities industries have remained weak. Meanwhile, the average hourly wage growth rate slowed to 3.5%, the lowest level since May 2021.
The latest report also shows that the number of people working part-time for economic reasons has increased abnormally and significantly (these people originally wanted to work full-time but may have had their working hours reduced). However, the increase from 4.6 million to 5.5 million is so large that it raises doubts.
The latest report may tie the hands of the Federal Reserve. Although policymakers can still obtain another non-farm payroll report before the Fed’s January meeting, the absence of the October report and the numerous uncertainties in the November data will make it extremely difficult to interpret the overall trend. This also highlights the extreme recklessness of the current administration in allowing the Bureau of Labor Statistics to suspend normal data releases for over a month.
The first issue is that the impact of the government shutdown itself on the survey is not clear. Generally speaking, those temporarily furloughed government workers who were expected to be recalled should be classified as “temporary layoff unemployed”, but we have learned from previous government shutdowns that individuals do not consistently self-classify in government surveys. In fact, “temporary layoff” seems to account for about 10 of the 12 basis points increase in the unemployment rate, but we cannot be certain of the accuracy of this explanation.
Secondly, due to the government shutdown, the Bureau of Labor Statistics (BLS) missed the opportunity to collect unemployment rate data for October, making it difficult to judge the unemployment rate trend and reducing the reliability of the statistics themselves. The BLS also pointed out that the response rate of the survey is on a downward trend and stated that multiple factors combined mean that the unemployment rate “needs a change of 0.26 percentage points to be statistically significant, while the required change in September was 0.21 percentage points.” Although any report should be treated with caution, this month’s situation is particularly so.
These additional conditions might offer some reassurance to some people, and the market seems to agree. Before the release of the report on Tuesday, the futures market indicated that the Federal Reserve would cut interest rates about twice next year, and this expectation changed little even as the unemployment rate soared.
But it is extremely difficult to draw a conclusion that the labor market is in good shape by integrating the evidence of the past few months. The crux of the debate actually lies in the degree of disappointment. Although the number of layoffs has not yet soared (at least according to government data), the number of job vacancies is low, there are few successful cases of new hires, and all salary indicators are cooling down. Unless there is a fundamental change – such as a major adjustment in tax policy or a significant drop in interest rates – the unemployment rate will continue to rise slowly. Hopefully, this process will be slow enough for policymakers to take timely action to avoid an economic recession.
