November Employment Report Should Not Stop a December Fed Hike, But...

The November Employment Report should not stop Fed officials from tightening by 25 BPs in December, but should reinforce their desire to emphasize a gradual approach to next year's tightening.  Such a combination at the December FOMC Meeting should be a positive for stocks and possibly for Treasury prices, but a negative for the dollar.

The bottom line of the Report is that the US economy is growing at or above trend, albeit likely only in the moderate 2.0-3.0% (q/q saar) range, in Q416.  Both the strong and weak parts of the Report appear to be exaggerated by technical or temporary factors.

1.  The +178k m/m increase in November Payrolls was boosted by a 22k jump in Government Workers.   Most of the latter jump was outside of education and likely consisted of temporary election workers.  These should reverse in December.

2.  Private Payrolls -- more indicative of the economy than are Total Payrolls -- rose only 156k after they rose only 135k in October.  Both are below the 170k 12-month average ending in November.  So, they suggest a downshift in the underlying trend of job growth.

3.  Even with this downshift, job growth is enough to put the Unemployment Rate on a downward path -- as evidenced by the drop in the Unemployment Rate to 4.6%.

          a.  The drop could be lagged effect of the strong 3.2% Q316 Real GDP Growth.  The traditional model relating the Unemployment Rate to GDP Growth shows both the current quarter's and past quarter's GDP Growth impact the current quarter's change in the Unemployment Rate.

          b.  While Street Economists may emphasize that the drop in the Unemployment Rate to 4.6% in November was "due" to a decline in the Labor Force, it is more likely that the composition of the Rate -- Labor Force and Civilian Employment -- was influenced by the small sample nature of the Household Sample.  The Sample just happened to consist of people who fell out of the labor force.  The Unemployment Rate, itself, cancels out this small sample bias, so its decline

4.  The low -0.1% m/m Average Hourly Earnings was likely largely a result of calendar factors and thus exaggerates weakness.

            a.  These factors point to a 0.3% m/m increase in December.

            b.   The y/y fell to 2.5% from 2.8% in October.  But, it remained in the 2.5-2.8% range seen since May.  If the m/m rebounds to 0.3% in December, the y/y will bounce back to 2.8-2.9%.