Economics & Growth | Monetary Policy & Inflation | US
Summary
• November NFPs were lower than expected, continuing a trend of slowing employment growth.
• This could reflect firms growing more cautious after the Q3 slowdown, and their reluctance to hire will probably increase with the Omicron variant. This casts doubts on a Q4 growth rebound.
• The Fed will still likely announce faster taper and higher dots on 15 December.
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Summary
- November NFPs were lower than expected, continuing a trend of slowing employment growth.
- This could reflect firms growing more cautious after the Q3 slowdown, and their reluctance to hire will probably increase with the Omicron variant. This casts doubts on a Q4 growth rebound.
- The Fed will still likely announce faster taper and higher dots on 15 December.
Market Implications
- Flatter curve
The Large Establishment/Household Survey Disconnect Is Unusual But Not Unknown
The November non-farm payrolls (NFPs) held two major surprises. First, they were much lower than expected at 210,000 against the 550,000 Bloomberg consensus. Second, a large difference is apparent between NFPs (that come from the establishment survey) and employment (from the household survey), which increased by 1.1mn.
Key differences between household and establishment surveys are:
- Multiple jobholders are counted once in the household survey but for each job in the NFP.
- The household survey includes the unincorporated self-employed and workers on unpaid leave, who are excluded from the establishment survey.
- The household survey is lower quality as it surveys 60,000 households, against 144,000 establishments/697,000 worksites for the establishment survey.
The November discrepancy between household and establishment data is rare, but not unheard of. Expressed as a rolling five-year Z-score, a difference of that magnitude happened in about 4% of the releases since 1965. And, of course, the pandemic has made collecting data more difficult and added noise to the series. Over multi-year periods, however, the series tend to track closely.
Employment Trends Firmly Downward
For all the noise of the various employment measures, their growth trend is clearly down (Chart 1). Also, while average and prime participation increased by 0.2% and 0.1% respectively, they remain well below the pre-pandemic levels. Men’s prime participation is up 0.9% from its December 2020 low but remains 1.1% below pre-pandemic levels (Chart 2). The slow participation recovery aligns with the prevailing unemployment rate (Is the Great Resignation a Figment of Our Imaginations?).
November NFPs Cast Doubt on Q4 Rebound
November payrolls do not reflect the 26 November WHO announcement of Omicron as a variant of concern since the survey week was the week of 12 November. But going forward, the added uncertainty of Omicron will probably make firms even more cautious about adding new workers to their payrolls (Omicron: Micro or Macro?). Businesses may take a few months to regain the confidence to increase hiring.
This is bound to impact household income negatively. Since pandemic-related government transfers have ended, wages and employment now drive household income. In this context, continued sequential growth in real consumption will depend on a further fall in the savings rate.
But the savings rate is already back to below pre-pandemic levels and may have little room to fall. Instead, risks to the savings rate could be tilted to the upside because the recent declines could reflect consumers bringing forward end of year purchases, rather than aiming for a long-term lower savings rate. With consumption representing 70% of US GDP, these factors cast doubts on the market consensus that GDP growth would rebound to 4.9% SAAR in Q4, from 2.1% SAAR in Q3.
Market Consequences
Contrasting the BoE, the Fed is looking through the Omicron risk. The difference in reaction function likely reflects that the Fed is more hawkish than the BoE (BoE Hawkishness Highlights Risks of Faster US Taper). It could also reflect that, unlike the UK, the US has experienced a fiscal-policy-induced positive demand shock. In 2020 and 2021 H1, US personal income was 7.5% and 17% above the corresponding periods in 2019.
In this context, rather than the slowdown in employment growth, FOMC members will likely pay more attention to two things. First is the decline in the unemployment rate to 4.2%, 0.2% above their estimate of long-term unemployment. Second is wages, which are still above pre-pandemic trends. Consequently, the November NFP downside surprise is unlikely to stop the FOMC from announcing a faster taper and from raising the 2022 dots at the 15 December meeting. I think this suggests further curve flattening.