What US stock market investors should remember from the November employment report

Bloomberg: Despite the fact that US firms are rapidly adding employment, the pool of available candidates continues getting smaller. That is the most important finding from the November jobs data, which was released on Friday. For the Federal Reserve, this finding is not promising.

As more Americans left the workforce last month, the labour shortage that has plagued companies since the epidemic hit worsened. As businesses vie for the talent that is in demand, wages increased the greatest in over a year.

The Fed will likely feel it needs to apply the brakes even more firmly since, in its eyes, all that additional money in consumers’ pockets implies they have greater purchasing power, which fuels inflation.

Beth Ann Bovino, chief economist for the US and Canada at S&P Global Ratings, stated, “We have nearly 4 million fewer jobs than the pre-pandemic average, so we’re extremely far behind.” “The Fed cannot compel anyone to enter the labour. To restore equilibrium, all they can do is undermine the economy.

Following the release of the employment report, this assumption led to a selloff as investors gambled on further higher interest rates intended to squeeze the economy. The S&P 500 had a 1.2% decline in stocks before partially recovering its losses, while two-year Treasury bond rates skyrocketed.

While US payrolls increased by 263,000 from October, above experts’ expectations, the rate of wage growth came as a larger shock. Earnings per hour on average increased twice as much as anticipated.

That is related to the talent pool’s decreasing size. This hasn’t occurred in more than a decade, but the so-called participation rate, or the percentage of Americans who are either working or actively seeking for a job, fell for a third consecutive month. It is considerably lower than pre-pandemic levels at 62.1%.

Lack of child care options, early retirements, and lower-than-normal immigration all contribute to a smaller US workforce than would otherwise be the case. The Fed hoped that when the economy cooled, many of those who left would be compelled to return, but that hasn’t occurred.

Instead, corporations are being forced to pay more, which is concerning to the Fed. Earnings for the majority of employees have fallen short of inflation ever since US prices started to rise substantially last year. However, central bankers worry that wages and prices might spiral upward in what is known as a wage-price spiral.

He said that salaries were not the main cause of the current inflation. “We believe that salary rises will likely play a significant role in the story moving forward.”

Even if the Friday report’s headline figures show a booming employment market, there are a few hints that things could be about to slow down hidden in the details.

For instance, a large portion of the newly generated employment are centred in sectors like leisure and hospitality or local government that, in some respects, are still catching up after all the pandemic upheaval. Major sectors of the economy are also downsizing their workforces, including transportation and warehousing as well as retail.

Additional recent statistics have shown that a labour slowdown may be on the horizon. A recent study revealed that less than one-in-five small company owners want to hire in the foreseeable future, while job opportunities have decreased and continuous requests for unemployment insurance have gradually increased in recent weeks.

Nevertheless, the robust hiring and increase in pay in Friday’s statistics masked such warnings. Surprisingly, even sectors that appeared to be struggling, like real estate, which is suffering from a housing crisis, or the information industry, which has witnessed layoffs at prestigious tech companies, were still hiring overall.

Bovino of S&P said,

“It’s fantastic that people are obtaining jobs, and it’s excellent that people are earning greater pay.” “But you end up witnessing the spiral that the Fed hates the most if employees continue to seek more salaries to keep up with ever-rising total expenses.”

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