How to Read Tuesday’s Confusing Employment Report

Tuesday’s mixed employment report caught the attention of a variety of market players, from hawks to doves.

The employment data for November was released, albeit a bit later than normal—about a week and a half behind schedule. This delay was due to the government shutdown, pushing the report from the typical first Friday to the third Tuesday of the month. The report combined standard monthly figures from both last month’s Establishment and Household Surveys, while it had to use October’s data from the Establishment Survey. Notably, the household survey on unemployment and labor force participation rates wasn’t available for October, thanks to the timing of the shutdown.

Starting with the household budget survey, the unemployment rate edged up to 4.6% after rounding. Interestingly, bond yields dropped and stock prices climbed, as an early cut in rates seemed more likely for next week. However, this uptick was less than anticipated, showing a rise from 4.44% in September to 4.56% in November—amounting to about 0.06 points each month, a gradual increase that suggests a healthy labor market without immediate recession signals.

It’s worth noting that the 4.56% unemployment rate is quite close to the 4.5% median estimate provided by Federal Reserve officials in their economic outlook from last week. If the unemployment rate remains relatively stable in December, which will be reported in January, the Fed will probably feel secure keeping their policy steady during the late January meeting.

This rise in unemployment had several positive underpinnings: an increase in both the population and labor force participation rates. Over the two-month period, the adult civilian population grew at an annual rate of 0.9%, while the labor force increased even more rapidly, at 1.13% annually. Labor force participation rose to 62.5%, indicating that more Americans are pursuing jobs, likely due to better conditions and higher pay.

Government Employment Declines Significantly

Another aspect contributing to the unemployment rise was the noticeable decline in government employment, showcasing the government’s progress under the Trump administration’s aim to “re-privatize” the U.S. economy. The quantity of individuals holding government jobs dropped by over half a million, from 22,554,000 in September to 22,051,000 in November. Conversely, data from the household budget survey indicated an increase in private sector employment by 206,000, translating to a growth rate of 1%, slightly above the population growth rate.

Following the office survey, salaries surged more than expected in November, with economists predicting job gains of 45,000, far below the reported 64,000. In October, job losses amounted to 105,000, primarily from federal pay cuts. Currently, the rolling three-month employment average is about 22,000, which is considerably lower than what’s typically needed to prevent a rising unemployment rate.

However, the contraction in October might be somewhat misleading. It was largely driven by significant job cuts in the federal sector, stemming from early retirement packages that were finally reflected in pay reductions. Federal employment dropped by 157,000 in October and another 6,000 in November, totaling 271,000 jobs lost since its peak in January under President Biden. Federal salaries have now hit their lowest point since December 2014.

Stripped of Health Care, Private Sector Cuts Jobs

On a brighter note, private sector employment exceeded expectations by adding 69,000 jobs, more than the 30,000 that were forecasted. Since the last employment report, private sector growth has seen an increase of 120,000 jobs, averaging about 60,500 gains per month. The three-month rolling average has also risen to 75,000, a significant uptick from just 13,000 in August.

Yet, much of this growth appears to stem from adjacent sectors related to government health and social assistance, where government funding generally bolsters jobs more than actual economic need. Employment contracts emerged in manufacturing, transportation, warehousing, IT, and temporary services. Conversely, the leisure and hospitality sector—a discretionary area—saw a decrease of 12,000 jobs.

Excluding health and social assistance, the private sector actually cut 7,600 jobs between September and November, leading to an annualized contraction rate of 0.41%. This indicates that the Fed’s decision to lower interest rates in September was likely a prudent move.

In summary, the employment report presents both a better and worse picture than initially perceived. For one, the rise in unemployment was linked to government pay reductions and an increased labor force participation. On the downside, the private sector’s growth was predominantly in non-cyclical, government-related segments.

If this had been the final report before the next Fed meeting, it could have leaned toward advocating for further rate cuts. However, with another month before their meeting and the noise surrounding this report, the next set of data will likely play a crucial role in shaping policy moving forward.