Ahead of the report today, the 3-month average employment gain was 202k so against that metric the employment gain in November was bang on its recent trend. The Establishment Survey showed a 203k increase in November which can be benchmarked against the 185k Bloomberg consensus (although more recently expectations moved higher after the ADP surprise). The real kicker in today’s report, meanwhile, was that that the jobless rate fell to 7.0%, its lowest level since November 2008. Revisions were net positive. Employment growth was revised higher in September and slightly lower in October. Moreover, employment gains were broadly-based in November.
Meanwhile, the labor force participation rate rose to 63.0% (was 62.8%) as the civilian labor force rose by 455k in November after declining by 720k in October. We expected, however, that the October drop in labor force participation would fully reverse in November. Since that did not happen, the unemployment rate fell more than expected. On the other hand, since labor force participation actually increased over the month the glass-half-full-crowd will say that the jobless rate declined for the right reason; a pickup in hiring as opposed to an exodus from the labor force. Be that as it may, this is the first time in exactly five years that the unemployment rate has been 7% or lower.
Also beneath the surface, this was a strong jobs report. The diffusion index of private payrolls rose to 63.5 from 61.3 and in manufacturing the diffusion index surged to 63.0 from 56.8. As such, the diffusion indices are suggesting healthy and broadly-based employment growth in the months ahead. Average weekly hours rose to 34.5 from 34.4, and overtime hours were up too. The index of aggregate weekly hours rose 0.5% between October and November. Factory payrolls rose 27k; the strongest gain in more than a year thus mirroring the ISM employment index.
We have previously communicated that a strong jobs report would strengthen the case for the FOMC to begin tapering in December. In addition, according to media outlets lawmakers are close to a budget deal for the fiscal year that ends September 30, 2014. As such, we see reasons to change the probabilities for Fed action – a tapering decision in December is now our baseline. The decision is data-dependent, and over the last few months the labor market has really shifted into higher gear. Since the improvement looks sustainable too, why wait?
That being said, after the surprise decision not to taper in September, the FOMC’s reaction function is not easy to wrap your head around. As such, tapering may well happen at a later meeting so act accordingly. With respect to the fed funds rate, we remain confident that it will stay at its current, near-zero level for the foreseeable future. Since it is important that markets believe that too, the FOMC should strengthen its forward guidance on the federal funds rate, preferably by cutting the unemployment rate threshold from the current 6.5% (although there are other options available).
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