Labor Market Continues to Post Solid Job Gains, While Manufacturing and Services Activity Suggest Q4 Slowdown

Key Takeaways:

• Nonfarm payroll employment increased by 199,000 in November, according to the Bureau of Labor Statistics (BLS), though the headline gain was inflated by the ending of the United Auto Workers (UAW) and Screen Actors Guild (SAG) strikes, which contributed an increase of up to roughly 47,000 workers. Still, the household survey was robust with the unemployment rate moving down two-tenths to 3.7 percent, the lowest level since July, and the labor force participation rate ticking up one-tenth to 62.8 percent. Average hourly earnings were also strong, rising 0.4 percent over the month, an acceleration from the prior three months of cooler wage growth.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 617,000 to 8.7 million in October, the lowest level since March 2021, according to the BLS. The quits rate was constant at 2.3 percent for the fourth consecutive month, the same level it was at before the pandemic. Layoffs and discharges moved up slightly but remained at a low level of 1.6 million, roughly 200,000 below the 2019 average.
• The ISM Manufacturing Index was flat at 46.7 in November. The production index declined 1.9 points to 48.5, while the more forward-looking new orders index rose 3 points to 48.3 but remained below the expansionary threshold of 50.
• The ISM Services Index increased 0.9 points to 52.7 in November, reversing half of its decline the month prior. The business activity index was up 1 point to 55.1, while the new orders index was flat at 55.5.
• Consumer (non-mortgage) credit outstanding increased by $5.1 billion in October, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $2.9 billion, while nonrevolving credit (largely student and auto loans) rose by $2.3 billion.
• Factory orders dropped 3.6 percent in October, though this was due in part to volatile nondefense aircraft orders, according to the Census Bureau. Excluding transportation, orders were down 1.2 percent, and nondurable goods orders declined 1.9 percent.
• The real goods U.S. trade deficit widened by $737 million in October, according to the Census Bureau. Real exports declined 0.2 percent, while real imports rose 0.2 percent.

Forecast Impact:

The labor market again posted a solid gain in November. As is often the case, there are one-time issues with this report, in this case the effect of labor disputes in the auto, entertainment, and other sectors ending. Removing the effects of the strikes from both reports would indicate payroll gains slowed modestly in November compared to October. Additionally, employment in retail trade was reported to have declined by 38,000; however, this number is heavily dependent on a difficult to produce seasonal adjustment around changing patterns in the mix and timing of holiday shopping of recent years. Therefore, employment changes aside from strike effects and the retail trade figures were similar in November as compared to October, signaling a solid labor market. Additionally, while wage growth came in a bit hotter this month than it had over the prior three months, other underlying data typically indicative of wage pressures, such as job openings and the quits rate, also continued to suggest normalization in labor market conditions in October. All told, we expect a modest upward revision to our Q4 payroll forecast. The recent rapid decline in rates -- in particular, the mortgage rate is down close to 80 basis points since the end of October -- along with continued job growth are beneficial for homebuyers; however, if the labor market remains strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse.

The ISM indices remain broadly consistent with a slowdown in economic growth in the fourth quarter, however. Despite the end of the UAW strike, manufacturing activity remained in deep contraction and the services index remained in only modest expansion. Factory orders were also particularly weak, even when accounting for volatile aircraft orders, which signals manufacturing activity is unlikely to pick up soon. Additionally, small gains in credit outstanding, combined with recent weak income growth, support our forecast for more modest consumption growth in Q4.

Nathaniel Drake
Economic and Strategic Research Group
December 8, 2023

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