November Employment Report Shows Strong Labor Market But Little Inflationary Pressures

The November Employment Report is a positive for stocks and a modest negative for Treasuries, as it  showed widespread strength in job creation but little inflationary signs.  The report should keep the Fed on course for a 25 BP rate hike next Wednesday and further gradual tightening in 2018.

The +228k m/m increase in November Payrolls was well above the +169k m/m average over the first 10 months of 2017.  Some of the strength could be a further rebound from the hurricanes in September.  But, some was also reflective of the underlying strength of the economy.   In particular, manufacturing jobs in the capital goods industries rose smartly.  Even retailers added jobs, despite the shift to shopping on the internet.  Besides the job gains, the Average Workweek rose, also signaling strength.

The labor market strength at this point takes some of the wind out of the strong productivity story.   Total Hours Worked are up about 2.5% (q/q, saar) so far in Q417.  Combined with the q/q surge in self-employed, it points to about 3.5% (q/q, saar) in the aggregate hours figure used to calculate productivity growth.   Unless forecasts of Q417 Real GDP Growth move higher than the  3.5-3.9% current range, Productivity Growth should be a modest 0.5% this quarter -- a slowdown from the pace of the prior two quarters.  It is too soon to say that Q417 GDP estimates will not climb higher, however.

There is little evidence of inflationary pressures in the November Employment Report.  Wage inflation is benign.  Average Hourly Earnings rose only 0.2% m/m, with the y/y edging up to 2.5% from 2.4% and staying below the 2.7% Q317 average.  The Unemployment Rate edged up to 4.11% from 4.07% in October.  (Both rounded to 4.1% in the headlines.)  The broadest measure of unemployment, U-6, rose to 8.0% from 7.9% in October, but remained below the 8.5% Q317 average.