This was a very strange jobs report. While the headline number looks pretty good, the details look weak. Here are my thoughts.
This doesn't change the Fed's December decision...
Let's get this one out of the way. The Fed is still hiking on Dec.14. It was probably going to take a disastrous report to get it off that trajectory.
... but this does challenge the narrative that inflation is brewing
By far the most notable piece of this report was the wage figures. Average hourly earnings dropped 0.1% in November and now are only up 2.5% year over year. Expectations were for increases of 0.2% and 2.8%, respectively. To be fair, 2.5% is not a bad wage growth pace judging by post-2008 standards. But it puts us in the same range we've been since mid-2015. There was hope that wages had taken a leg higher and perhaps were gaining momentum as well.
From the Fed's perspective, this is crucial for two big reasons. One is that wage acceleration is a sign that we are at full employment. Now that picture is murky. Could the economy sustain even lower unemployment? Secondly (and more importantly), you can't really get higher inflation without also seeing faster wage growth. That is, the only way consumer prices rise is if consumers spend more money. They can't spend more money unless wages are rising.
What to make of the big labor force drop?
The other troubling piece of this report was the drop in the labor force. This is a measure of the total number of employed persons plus those actively looking for work. The labor force had been growing consistently this summer, which led some to argue that the general strength in the labor market finally was bringing back those disaffected workers who had given up looking for a job. Readers may remember I was highly skeptical of that view and argued that demographics suggested the labor force would shrink, at least as a percentage of the total population.
There is a ton of noise in the measurement of the labor force but bear this in mind: The total economy only can grow at the pace that its capital stock and labor force growth will allow. This is a key reason why countries with acute demographic problems (such as Japan) have been growing so anemically. The U.S. demographics are certainly better than Japan's (or Europe's) but aren't great. This will be a long-term governor on our ability to grow the economy. As an aside, that also will wind up being a governor on interest rates as well.
Last note on job gains
While a 178,000 increase in headline payrolls was right in line with expectations, I'm still concerned about how it has slowed. Historically job growth doesn't fall below around 1.5% annualized growth until the cycle has peaked and a recession is near. That equates to around 180,000 jobs per month right now. We are teetering on a stall zone.
Market is saying that this doesn't change the Trumpflation story
The market seems extremely confident to me that President-elect Donald Trump's policies will create a fiscal-led growth/inflation burst. I don't agree with that level of confidence. But if you buy the Trumpflation story, today's report doesn't really change anything. These jobs were all posted (and most of these people probably officially hired) before the election. If you think Trump's world boosts business confidence, you'd expect any hiring acceleration later, not now.
We're getting a minor rally in bonds, which makes sense. And I stand by the view that now is a good entry point for bonds if you have a longer-time horizon, especially in municipals. But if you are just doing it for a trade, the momentum remains very strong against you. Today doesn't change that.