PNC Chief Economist Gus Faucher: Another Strong Month of Job Growth in November Means More Fed Rate Hikes

This commentary is written by PNC Chief Economist Gus Faucher.

• The U.S. economy added 263,000 jobs in November, near the recent pace.
• The unemployment rate held steady in November at 3.7%, near a 50-year low.
• Average hourly earnings growth accelerated in November.
• Although there are some indications that the labor market is softening, it remains far too strong for the Federal Reserve, contributing to high inflation.
• The most likely economic outcome in 2023 is a mild recession.

US economy added 263,000 jobs in November according to a survey of employers, another strong month of gains. This was above the consensus expectation of 200,000. Job growth in October was revised higher, to 284,000 to 261,000, while September job growth was revised lower, to 269,000 from 315,000, for a net downward revision of 23,000. Over the past three months the U.S. economy has averaged monthly job growth of 272,000, well above the pre-pandemic pace. The private sector added 221,000 jobs in November, while government employment rose by 42,000.

The unemployment rate was 3.7% in November, unchanged from October and up from 3.5% in September, a 50-year low. The labor market remains extremely tight. Employment in a survey of households (different from the survey of employers) fell by 138,000, the second straight drop. The labor force—the number of adults working or looking for work—contracted by 186,000, while the labor force participation rate—the share of adults in the labor force—fell to 62.1%, from 62.2% in October. While the labor force participation rate has improved from 60.2% in April 2020 at the worst of the pandemic, it has been just above 62% throughout 2022, about a full percentage point below its pre-pandemic level. The post-pandemic labor market is structurally tighter than the pre-pandemic one.

Job growth was broad-based across industries in November. Goods-producing industries added 37,000 jobs over the month, including an increase of 14,000 in manufacturing. Construction employment rose by 20,000, even as the big increase in mortgage rates has led to a 30% drop in single-family housing starts this year. Private service-providing industries added 184,000 jobs in November, including increases of 82,000 in education/health and 88,000 in leisure/hospitality. But there were small declines in employment in retail and wholesale trade and transportation/warehousing, perhaps indicating some softening in the labor market. In addition, employment in temporary services has fallen for four straight months; changes in temp employment often lead the broader economy.

Average hourly earnings jumped 0.6% in November from October, the biggest increase since January. There were also upward revisions to wage growth in September and October. On a year-over-year basis average hourly earnings were up 5.1% in November, compared to 4.9% in October. Wage growth remains very strong as the tight labor market is leading businesses to increase their pay. However, on a year-ago basis, wage growth is slower than it was during the summer.

The Federal Open Market Committee will take little solace from the November jobs report. The labor market remains extremely tight, job growth continues to run well above its pre-pandemic, wage growth picked back up in November, and the unemployment rate remained near a 50-year low. The very strong labor market is contributing to inflation that is running far above the central bank’s 2% objective. The FOMC has been raising the federal funds rate throughout 2022 in an effort to slow growth and reduce inflationary pressures in the U.S. economy. But the labor market remains too hot for the Fed’s liking. In particular, construction employment continues to increase even as the typical 30-year fixed mortgage rate has jumped from below 3% in 2021 to close to 7% now. But there are some preliminary indications of job market softening, including employment declines in some industries and a second consecutive monthly decline in employment in the household survey.

With the labor market too strong from the Fed’s perspective, the FOMC will continue to raise the fed funds rate in the near term to further slow economic growth. PNC expects a 50-basis point increase in the fed funds rate at the FOMC’s next meeting, on December 14, to a range of 4.25% to 4.50%; it started this year at essentially zero. PNC then expects another couple of rate hikes in early 2023, bringing the fed funds rate to 4.75% to 5.00% by the spring. But unless job growth starts to slow, soon, the FOMC could be even more aggressive.

Ironically, by pushing the FOMC to raise rates further, continued strong job growth makes a near-term recession more likely. PNC’s baseline forecast for 2023 is a mild recession, as massive interest rate increases this year will likely lead to a drop in real GDP as they work their way through the economy. PNC expects job losses in 2023 as businesses start to cut back, with the unemployment rate increasing to around 5.5% by early 2024.

About the author: Prior to joining PNC in December 2011, Faucher worked for 10 years at Moody’s Analytics, where he was a director and senior economist. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He serves on the board of directors of The Economic Club of Pittsburgh - the local chapter of National Association of Business Economics (NABE). He is also co-chair of the Financial Roundtable of NABE. Faucher earned a Ph.D. in economics from the University of Pennsylvania and a B. A. in economics from Cornell University.