The labor market, while slowing, remains resilient. Initial claims – an established predictor of changes in the level of unemployment – have been trending downward. The four-week moving average of initial claims has been falling since Oct. 19, two weeks after disruptions caused by Hurricane Milton.
Since the Federal Reserve began raising interest rates in March 2022, the labor market has shed 4.6 million private-sector job openings. Nearly 30% of this decline occurred over the past year. As job opportunities contracted, labor mobility also slowed. The number of workers voluntarily leaving their jobs to seek other opportunities dropped from 4.2 million in March 2022 to 2.9 million last month. Over the same period, the unemployed population rose from 6 million to almost 7 million job seekers.
With a growing labor force and fewer job openings, the unemployment rate has climbed from 3.6% to 4.1%. Employment prospects have shifted from two job openings per unemployed worker to just one. Retail, manufacturing, and the information/technology sectors saw the sharpest declines in job openings.
These changes have made it harder for new entrants to find work in those sectors, while those dissatisfied with their current roles may struggle to secure better opportunities.
Inflation, Interest Rates, and the Fed’s Balancing Act
While the Fed has successfully reduced inflation, it remains above the central bank’s target. Concerns about a sharp labor market cooldown prompted the Fed to cut interest rates by 75 basis points this year.
Federal Reserve officials will closely scrutinize this week’s employment report for November. After stalling in August, job growth rebounded in September. However, hurricane disruptions affected October’s numbers, leading to the first decline in private-sector employment since 2020.
What to Watch in the Upcoming Jobs Report
To prevent prices from rising too quickly, supply must keep pace with demand. Without sustained improvements in productivity or an increase in the labor force, rising wages could stoke inflation by boosting consumer spending. Wage growth remains above pre-pandemic levels, but there is good news: productivity has surged this year. If these productivity gains persist, wage growth may not need to slow much to avoid a resurgence in inflation.
Traders and Fed officials will be watching for solid employment gains – a sign the labor market remains stable – paired with easing wage growth. A robust jobs report without a spike in wages could fuel a stock market rally. Conversely, a strong employment report without wage moderation might push Treasury yields higher and decrease the likelihood of a Fed rate cut in December. The probability of a rate cut stands at approximately 64%, with just 16 days remaining until the Fed’s decision.
Elsewhere in the Economy
The ISM Manufacturing Index is expected to reflect a rebound in manufacturing activity, aligning with trends in other surveys.
The ISM Services Index is unlikely to show significant change, with the sector remaining firmly in expansion territory.
