NFP Review: Labour Market Remains Tight

Summary

• NFP printed 227k, roughly in line with consensus of 220k.
• This was more than the 150k I expected but does not change my expectations of a medium-term decline in NFP to about 50k.
• The labour market remained tight and wage growth stuck at 4% but the ongoing productivity acceleration makes this consistent with 2% inflation.

Market Implications

• I still expect the Fed to cut 25bp in December, in line with market pricing.
• Longer term, I still expect no Fed cut in 2025 against markets pricing three.

NFP Roughly as Expected

November NFP printed 227k against 200k expected and the two months net revisions were 56k (Table 1 and Chart 1). Sam’s model predicted the upside surprise.

Private sector NFP printed 194k vs 205k expected (Chart 2).

The gap between NFP and the household (HH) survey widened further. Employment in the HH survey, unadjusted and adjusted to NFP definitions, decreased 355k and increased 117k respectively (Chart 2). This unusually large difference between NFP and HH survey reflects undercounting of illegal migrants in the HH survey since 2022.

I expected about 150k, based on lower immigration flows. The bigger rebound likely reflects more of a hurricane impact in October than I thought and that there is still a large stock of undocumented migrants trickling into the labour force, though inflows are falling.

Friday’s print does not change the US long-term demographics or that migrants numbers are set to decline further. I therefore still expect NFPs to trend down and, on average, surprise on the downside (Chart 4).

Labour Market Remained Tight

Overall, the labour market remained tight in November:

• Unemployment increased 10bp but the increase was in uninsured, rather than insured, unemployment (Chart 5). Because undocumented migrants are less likely to draw unemployment benefits, the increase in unemployment could have reflected more new migrants entering the labour market rather than a decrease in labour demand. Most importantly, the unemployment rate remains low by historical standards.
• Unvoluntary (‘for economic reasons’) part-time work fell 10bp and at 2.6% is below the 2019 average (Chart 6).
• Spread of African American and Hispanic unemployment over white unemployment remained low (Chart 7).
• Share of unemployment explained by more people starting to job search, as opposed to being laid off, rose to post-pandemic highs (Chart 8).
• Job finding rate fell (Chart 9). However, this is likely to reflect more undocumented migrants entering the workforce rather than weaker labour demand. NFP were strong and the recent JOLTS data shows lower ratios of unemployment to openings of actual hires to openings (Chart 10).
• Employment to population ratio ‘EPOP’ fell 20bp, in line with the 20bp fall in participation but the prime age EPOP remained near post-pandemic highs (Chart 11).

Sticky Wage Growth Offset by Faster Productivity Growth

Despite the small unemployment increase, wage growth remained stuck at 4%, up 40bp since mid-2024 (Chart 10).

However, recent Fed speakers have noted this relatively high pace of wage growth is partly offset by productivity growth, which has accelerated to 1.9% on average since 2020, compared with 1.4% on average in the 5 years before the pandemic. This faster productivity growth makes 4% wage growth consistent with 2% inflation and is likely a major driver of a likely December Fed cut, despite low unemployment, GDP growth well above long-term trends and inflation above target.

Market Implications

I still expect the Fed to cut 25bp in December based on this week’s MoM core PCE estimate remaining close to 25bp. Friday’s NFP print does not signal a loosening of the labour market but does not signal higher inflation ahead either. Markets are now pricing an 85% chance of a December cut, up from 50% three weeks ago.

Longer term though, inflation is likely to prove stickier than the Fed expects and I therefore expect the Fed to be on hold through 2025 against markets pricing three cuts.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)