The U.S. created 321,000 jobs in November, the biggest increase since January 2012. The gains were much higher than the 230,000 jobs economists expected. This solid month of employment growth will certainly influence the Fed’s decision on the timing and trajectory of interest rate hikes.
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The headline unemployment rate was unchanged at 5.8%, according to numbers released Friday by the U.S. Labor Department. The labor force participation rate held steady from a month earlier at 62.8%.
“Yet another month of strong job creation in November suggests the U.S. economy continues to grow at an encouragingly robust pace in the fourth quarter. Wage growth is also showing welcome signs of edging higher, and key indicators of labor market slack continue to improve,” said Chris Williamson, chief economist at research firm Markit. “All of which adds to the case for policymakers to start the process of bringing interest rates back to normal levels next year.”
November was the tenth consecutive month in which the U.S. gained 200,000 or more jobs.
“In November, job growth was widespread, led by gains in professional and business services, retail trade, health care, and manufacturing,” the Labor Department said in a statement.
Jobs created in September and October were revised upward by 44,000 jobs, and average hourly wages in November rose more than anticipated.
"One word can describe today's report: Spectacular. It's clear lower prices at the pump are attributing to the easy beat as consumers are enjoying the extra pocket change while increasing their discretionary budgets. Higher demand equates to additional hiring, and the employment growth in retail is concrete evidence of this occurring,” Todd Schoenberger, managing partner LandColt Capital LP said.
The November numbers were widely expected to be strong due in part to seasonal hiring for the holidays, in particular by package delivery companies such as FedEx (NYSE:FDX) and UPS (NYSE:UPS).
What the Blow-Away Report Means for the Fed
The Fed has been studying labor market trends for months in an effort to determine the proper timing for raising interest rates, a move that would push borrowing costs higher and could potentially cause a drag on the economic recovery.
While labor markets appear to be healing based on the steady decline in the headline unemployment rate, other labor market indicators suggest a slower recovery for many U.S. workers.
For instance, average hourly wages have been stagnant for months, a factor that has kept inflation running well below the Fed’s target rate of 2%. Wages have emerged as perhaps the key indicator being watched by economists to determine when the Fed might start raising interest rates.
In November, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents, or 0.4%, to $24.66 in November. That figure will surely catch the attention of Fed economists and come as welcome news to consumers.
The Fed has said it won’t start raising interest rates until it reaches its dual mandate of full employment and price stability. The central bank has defined the former as an unemployment rate in a range of 5.2%-5.6% and the latter as an annual inflation range of 1.7%-2%.
The unemployment rate is likely to drop into that desired range in early 2015, but the inflation target is trickier. Inflation isn’t likely to move higher until wages go up significantly, and that may not happen until late in 2015, according to most economists.
Over the past year, average hourly earnings have risen by 2.1%, well below the 3%-3.5% rate the Fed views as necessary to keep inflation at its desired 2% target rate.
Fed Chair Janet Yellen has frequently highlighted wage growth as an indicator the Fed is watching for signs that labor markets are strengthening beyond the declining headline unemployment rate.
But the downside to rapid wage growth is inflationary pressure. When wages rise too quickly it can lead to runaway inflation and eventually cut into corporate profits.
Wage growth and other inflationary indicators are currently at the center of a growing debate within the Fed over the timing of rate hikes. The consensus among Fed economists is that hikes should and will occur in mid-2015, soon enough to head off runaway inflation while remaining low long enough to continue providing stimulus to the fragile economic recovery.
When rates do move higher it will raise borrowing costs, making it more expensive for consumers to get a mortgage or a car loan, or for small businesses to get a loan for expansion.