Headline Employment Gains Mask Weakness

Payroll employment jumped a more-than-expected 266,000 in November while revisions were to the upside for the last two months. The return of striking workers at GM helped lift manufacturing employment for the month but job gains remain essentially unchanged from a year ago. The manufacturing sector actually appears to have lost jobs after adjusting for the return of striking GM workers and those laid off because of idled production at GM.

The service sector continued to hold up significantly better than manufacturing. Nearly 40% of job gains during the month were in healthcare and social assistance and leisure and hospitality. Professional and business services accounted for another 14% of gains. Job gains in the healthcare sector are being driven by aging baby boomers and a surge in the number of those who are over 80 years old. Gains in leisure and hospitality remain concentrated in food services, which suggests consumers opened their wallets during the month and stepped out a bit more than they had during the summer. Over the summer, consumers moved downscale in their restaurant choices as concerns over a trade war flared. Gains in professional services were broad-based.

Retail hiring was essentially unchanged for the month but has fallen more than 30,000 over the last year. Hiring peaked in January 2017 and has been on a downtrend ever since. The shift from in-store to online shopping has triggered a surge in retail bankruptcies, which is holding down overall employment. That is despite ongoing reports of shortages of retail workers. Retail behemoth Amazon announced it would rely more on robots to offset the shortage of warehouse workers and the squeeze of higher wages on margins this holiday season.

Average hourly earnings increased 0.2% between October and November, as higher-paid GM workers returned to their jobs. Average hourly earnings were up 3.1% from a year ago, about the same as last month, and off the peak of 3.4% hit last February. Wages in the information sector, which includes Silicon Valley, have decelerated sharply in recent months. Wage gains in the retail sector continue to outpace overall wage gains but have decelerated over the last several months. Wages in professional services have moved up more rapidly in recent months; this is welcome news to new college graduates who suffered a setback during the summer.

Hours worked remained unchanged, despite the return of striking workers at GM. Overtime in the manufacturing sector fell during the month compared to a year ago. That reflects the ongoing weakness associated with tariffs and growth abroad.

Separately, the unemployment rate fell a tick to 3.5%, a fifty-year low. The labor force participation rate has hovered at 63.2% for the last four months. Participation by prime-age workers is close to the highs hit prior to the financial crisis but still well below the peak hit during the 1990s boom. The biggest gains in participation have been in the over-65 crowd, albeit from a low base, over the last three months.

Bottom Line
Employment pleasantly surprised to the upside in November. The service sector continues to offset weakness in manufacturing. That is why a “phase one” deal with China is crucial, as it would stem the spread of tariff-related losses to the service sector. The Federal Reserve will be pleased with today’s data. Look for a more hawkish statement after the Fed’s meeting next week; Fed officials will want to affirm their place on the sidelines as we enter 2020.

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