U.S. November jobs report: This is what a soft landing looks like

REAL ECONOMY BLOG | December 08, 2023

Authored by RSM US LLP

This is what a soft landing looks like.

Through November this year, the American economy has produced nearly 2.6 million jobs as inflation has eased from 6.4% to 3.2%, all while the unemployment rate has remained below 4%.

This is not a recession but instead is a sustained expansion amid labor market conditions that meet our definition of full employment.

Despite predictions of a contracting economy, the dominant economic narrative this year turned out to be resilience and a soft landing.

It is critical to put this data in the proper context. Given long-term demographic changes in the workforce and the structural transformation of the U.S. economy, only 75,000 jobs need to be created every month to keep employment stable, significantly lower than the roughly 200,000 a decade ago.

Given the underlying trend in job growth, any number that is more than double that estimate demands to be referred to as strong if not robust. Job gains at this pace with an unemployment rate near 4% is what full employment looks like.

In November, total employment increased by 199,000 and the unemployment rate ticked down to 3.7% from 3.9% because of a statistically significant increase of 747,000 positions in the household survey that is used to estimate unemployment.

The top-line estimate was affected by the return of striking auto workers, so it overstates the monthly gain. But overall increase is still in line with the underlying trend, which we think is between 150,000 and 200,000.

The top-line increase in total employment was in line with the three-month average of 215,000 and was modestly below the six-month average of 192,000.

In addition, average hourly wages cooled to a 3.4% increase at a three-month average annualized pace, which is in line with what we think is a stable rate of growth consistent with price stability.

The labor force increased by 532,000 people streaming back into the workforce to take advantage of those solid wage gains. There are currently 168.26 million workers employed.

Cooling in hiring and wage growth reflects our call that the Federal Reserve is finished hiking rates and should now pivot toward stabilizing long-term real rates as inflation falls back toward tolerable levels of around 2.5%, which we expect in the second half of next year.

Policy implications

Trend growth in employment implies that the Federal Reserve is well positioned to hold rates steady next week at its policy meeting. We expect the central bank to keep its policy rate in a range between 5.25% and 5.5% and refrain from major changes inside the policy statement.

But investors will focus on what we think will be an additional two rate cuts embedded in the Fed’s forecast and a reduction in the year-end 2024 median dot plot to 4.875% even as the median 2025 dot plot remains unchanged.

We the Fed to lower its inflation forecast for this year and next as disinflation continues ahead of what we expect to be further downward pressure in the consumer price index and personal consumption expenditures index.

In addition, we expect upgrades to this year’s gross domestic product estimate, which is on pace to grow nearly 3% for this year and around 1.8% next year, well above the Fed’s forecast of 1.1%.

We also expect the Fed to lower its estimate of the unemployment rate this year to 4% from 4.1%, and next year to 4.3% from 4.6%.

Our economic forecast for next year implies that the Fed will cut its policy rate by 100 basis points starting in midyear as inflation eases and the central bank pivots toward bringing down real rates to improve business conditions and the cost of borrowing inside the American real economy.

The data

Total private employment increased by 150,000 in November, driven by an increase of 99,000 jobs in private education and health care, 49,000 in government, 40,000 in leisure and hospitality, 29,000 in goods production, 28,000 in manufacturing and 2,000 in construction.

Information workers increased by 10,000 jobs and financial employment added 4,000 to total employment. The number of retail trade workers declined by 38,000, trade and transport lost 35,000, professional business workers fell by 9,000 and temporary employment declined by 14,000.

Prime-age workers (25-54) are close to or at full employment with 89% of men in that cohort at work and 78% of women employed. Overall, 83.3% of people in their prime working years are employed.

The median duration of unemployment increased to 9.2 weeks, or just over two months. This increase is not surprising given the rise in continuing claims during the Bureau of Labor Statistics’ sampling period.

Still, employment remains plentiful, and those out of work have been able to find a new job under current economic conditions.

Average hourly earnings increased by 4% on a year-ago basis and rose by 0.4% on the month. We think that this figure, like the top-line employment estimate, was distorted by the return of striking auto workers and will show slower growth in the coming months.

Aggregate hours worked increased by 0.3% and were up by 1.4% on a three-month average annualized pace, reflecting strong demand for labor in line with solid overall economic activity.

The takeaway

Demand for labor remains robust and rising wages served as an incentive to draw 532,000 workers back into the labor force. We think that the underlying pace of job growth will continue to cool, which should underscore the case for the Federal Reserve holding rates steady next week.

This is what full employment and a soft landing look like.