Will Fed Hit Pause Button on Rate Hikes In Wake of November Jobs Report?

by Taylor Williams

The U.S. economy added 155,000 jobs in November, according to the Bureau of Labor Statistics (BLS), falling well short of the consensus forecast of 195,000 jobs. Still, November marked the 98th consecutive month of employment gains. Meanwhile, the unemployment rate held steady at 3.7 percent, while year-over-year wage growth registered 3.1 percent, one of the highest rates of the cycle.

Given the recent volatility in the stock market, the shrinking spread between the two- and 10-year Treasury yields and the adverse impacts of tariffs on U.S. manufacturing, the latest jobs report raises an interesting question: Will the Federal Open Market Committee (FOMC), the branch of the Federal Reserve Board that shapes monetary policy, decide to increase the fed funds rate another quarter percentage point to 2.5 percent at its next meeting on Dec. 18-19? spoke with three economists on what the jobs data means for America’s short-term fiscal policy, as well as expectations for retail and manufacturing output and job growth during the holiday season. This month’s featured participants are Michael Hicks, director of the center for business and economic research at Ball State University; K.C. Conway, chief economist at CCIM; and Itziar Aguirre, senior research analyst at CBRE. What follows are their edited responses:

Rebusinessonline: The economy has recorded some of the strongest wage growth of the cycle during the last two months. How might the current pace of wage growth, combined with the historically low unemployment rate, impact interest rates/fiscal policy in 2019?

Michael Hicks: Year-over-year wage growth was a solid 3.1 percent, but after adjusting for inflation, it is really barely approaching 1 percent. At this point in the business cycle, we should have higher wage growth.

The Federal Reserve’s dual mandate leads it to look closely at inflation and employment. Wages are instructive, but the Fed won’t allow higher inflation to boost higher nominal wage growth. We should see continued tightening given the information we have. If the Fed defers a rate increase in December, or waits until mid-year for another rate increase, that is evidence of a broader slowing of the economy. 

K.C. Conway: This item is my No. 1 concern as to why the Fed remains in rate-hike mode in December and into 2019. Wage inflation was 3.1 percent year-over-year. When the Fed looks at year-over-year wage inflation that is greater than 3 percent, a sub-4 percent unemployment rate, home price appreciation of more than 5 percent and a 10 percent rise in materials/commodity prices for manufacturing, it sees inflation on the horizon and will continue in rate-hike mode — at least for December.

The one encouraging metric that may give the Fed pause is the U-6 unemployment rate (which includes discouraged workers who have quit looking for a job and part-time workers who are seeking full-time employment). The U-3 “official” unemployment rate of 3.7 percent is below the Fed’s comfort zone of 4.5 to 5 percent. However, the more important U-6 unemployment rate — the most complete and broad measure of unemployment — rose to 7.6 percent. This rise is attributable to retail store closings and bankruptcies, as well as the impacts of Hurricane Michael and Florence on the Florida Gulf Coast and North Carolina.

This U-6 measure of unemployment is what should give Wall Street the most hope for a “Miracle on 42nd Street” and no rate hike by the Federal Reserve in December because it suggests there is still labor capacity to fill the job openings that now exceed the number of unemployed adults. For the first time in a half-century, the U.S. has more job openings than unemployed adults. 

Itziar Aguirre: Average hourly earnings grew by 3.1 percent over the previous year, matching October’s strong gain and the largest single-month increase since 2009. The November wage figure may be a hint that rising wages, rather than being a temporary glitch, is more of a sustained trend as the labor market approaches full employment. Given the shortage of available labor, further wage growth should continue, adding to inflationary pressures in the U.S. economy and likely ensuring a December interest rate hike by the Fed.

The primary goals of fiscal policy are to reach and maintain full employment and a high rate of economic growth, as well as price and wage stability. The November jobs report is likely not a game-changer and is strong enough to keep the Federal Reserve on track to raise interest rates later this month. In terms of next year, given the remarkable amount of uncertainty surrounding issues such as U.S.-China relations and Brexit, U.S. fiscal policy will likely become more dovish, raising rates two or three times during 2019. The Fed has signaled that the path of rate hikes may be modified. If the slowdown in employment gains persists, the Fed will hold off for a while. 

REBO: Is the current volatility we’re seeing on Wall Street an indicator of possible cracks in the strength of the U.S. economy, or are other factors causing fluctuations in the major stock indices?

Hicks: Normal stock fluctuations aren’t usually attributable to external policy chatter, but this time is different. The growing trade war is, and should be, a deep economic worry for Americans. It could have large short-term, and even worse long-term consequences, so undisciplined vacillations in public statements by the president almost surely move investment dollars.

Trump has done surprisingly well in foreign affairs, and rightly understands that economic power is a critical component of our ability to influence the behavior of friends and foes. He is also correct that China may one day be a threat to world stability. He is wrong, however, in imagining that tariffs will support our goals of greater world peace and prosperity, as well as a China that is more free and democratic. As an economic policy, tariffs are typically counterproductive, and the effect of undisciplined banter about tariffs introduces huge uncertainty into U.S. business decisions. 


American stock exchanges have seen some of their most turbulent activity of the cycle in 2018.

Conway: The CCIM Institute and Alabama Center for Real Estate at the University of Alabama recently published a paper on this point titled “CRE Finance Disruption: Déjà Vu or Something New?” In the paper, events that triggered past recessions and commercial real estate finance disruptions were examined as a proxy for what lies ahead. These disruptions play out via a rise in stock and bond market volatility as investors attempt to re-price slower growth into equities and asset prices. The combined impact of two years of Fed rate hikes and the onset of tariffs and a trade war with China, as well as the re-emergence of currency crisis concerns that started over the summer in Italy and have now spread to Turkey, Argentina and other emerging markets, all germinate the seeds of uncertainty and volatility.

The U.S. is one quarter shy of the 10-year anniversary of this recovery, and since 1857, the economy has never gone 10 years without a recession. History and now-elevated market volatility are working against the U.S. economy, which is showing all the classic signs of a normal cycle slowdown and mild recession ahead — most likely late in 2019 or early 2020.

A lack of resolution to tariffs with Europe and China and failure by the new U.S. Congress to ratify the new United States-Mexico-Canada Agreement in 2019 (replacing the North American Free Trade Agreement) would be the straw that breaks the back of this recovery cycle. It’s not just electronics, medical devices and cars that the U.S. makes and exports; it is a lot of agricultural products (like soybeans) and it is a lot of commodities. All the telltale signs of economic slowing and possibly recession are poking their heads above the surface. 

Aguirre: Friday’s jobs report caps a whipsaw week that saw a high degree of stock and bond market volatility. The steady but slightly disappointing addition of 155,000 jobs, combined with strong but expected wage growth of 3.1 percent, should add some calm to the market volatility that was led by concerns about the Fed raising interest rates too quickly and an escalating trade dispute between the U.S. and China. The Fed has since signaled that the path of rate increases may be altered, and the Trump administration announced that it would delay any further tariffs against China for at least 90 days.

Another concern involves potential long-term Treasury yield curve inversion, in which short-term yields surpass long-term yields. Inversion of the two- and five-year and three- and five-year Treasury yield occurred earlier this week, while the spread between the closely watched two- and 10-year Treasury yield has narrowed but not yet inverted. As for fears over trade, the U.S. has suspended any further tariffs against China at least until March. In the interim, China has agreed to purchase materially more agricultural goods from the United States. Market volatility likely will continue until a firm agreement between the two countries is reached.

REBO: Manufacturing added 27,000 jobs for the month despite a strong dollar and select tariffs on U.S. exports. How do we put explain these numbers, and is this sector’s performance still a reliable economic indicator?

Hicks: Manufacturing employment growth has faltered in recent months, and actually declined in Indiana, which has the highest share of factory employment in the nation. The creation of 27,000 jobs last month is a good sign, maybe the most hopeful in the jobs report. However, manufacturing job growth is probably coming to a natural end in the next several quarters as productivity rebounds.

Conway: It takes time for manufacturing jobs to slow, as it is always better for a factory to remain operational versus idle as long as it is still producing a positive profit margin. Quarterly earnings of major manufacturing companies are a gauge on the health of manufacturing versus volatile jobs reports by the BLS, as those lag reality and get revised for many months after.

Tariffs are eroding the margins in manufacturing. Caterpillar’s third-quarter earnings are a good case in point. These figures tell us two things: (1) margins are being adversely impacted by the tariffs, but not yet to a point of idle manufacturing; (2) material and labor input items are rising well above a 2 to 3 percent inflation level. This kind of materials and labor inflation is what concerns the Fed and leads to more rate hikes. Rate hikes that hurt the currencies of emerging markets are a bigger concern for manufacturing. The bottom line is that new orders for manufacturing are still enough to add employment, but the margin erosion is giving manufacturers pause for 2019.

Aguirre: The manufacturing sector has a notable footprint in the U.S. economy. It accounts for roughly 12.8 million workers, or about 8.5 percent of total U.S. employment, and more than 11 percent of GDP. As a result of increased automation and technology in factories, manufacturing jobs are requiring increased skill and the sector is grappling with a shortage of skilled workers.

Out of the 27,000 manufacturing jobs added, more than half of them (15,000) were in the durable goods sectors, likely due to one (or a combination) of two things: companies investing in equipment or consumer confidence. While manufacturing activity influences GDP as well as employment — and perhaps even wages — increases in manufacturing activity can also be misleading. When examining manufacturing data, it is also important to look at retail sales. The rise of both demonstrates a heightened demand for consumer goods. 

REBO: Historically, retailers have added to their workforce during the holidays, but overall this sector “changed little” in November, according to the BLS. Are we likely to see greater job growth in retail when the December employment figures are released next month? 

Hicks: Probably not. With Thanksgiving coming so early in November, this is nearly the longest shopping season we can have. As a result, if there was a big jump in hiring, we would have seen it. The only caveat is that a revision in next month’s data could well be concentrated in retail employment. Remember, with e-commerce growing, much of what we think as retail job surges is now happening in the warehousing and logistics industries. 

Conway: The short answer is “no.” Retail is in a structural change in the U.S. and globally from a “shop-and-take-home” business model to an “order-online-and-deliver” business model. This translates to more mall department store and big-box store closings. The new department store or big-box retail store is an e-commerce fulfillment warehouse that processes online orders.

While there is good job growth in this area, most of these jobs are not classified as retail jobs in the BLS employment data. Therefore, it is difficult to accurately correlate the number of lost retail store jobs to newly created e-commerce fulfillment jobs. Many of the latter are classified as warehouse or transportation type jobs.

One point is clear, however. The challenge for manufacturers and retailers is to get the margins right with this new e-commerce retail model as it expands to grocery and even automobiles. Currently, the volume of returns — 30 percent of all that is ordered online is returned — is decimating retail margins. The solution will be more automation of the e-commerce fulfillment process, including returns. And this will not be accretive to job creation as robotics do more of the online order processing and return handling. 

Aguirre: Retail employment grew by 18,000 jobs last month, accounting for 12 percent of the 155,000 new jobs. Job gains occurred in general merchandise stores and miscellaneous store retailers, but were partly offset by declines in clothing and clothing accessories stores, electronics and appliance stores, sporting goods, hobby and book stores. There is a good chance that these numbers will be revised up, or that December employment figures will be higher, as seasonal hiring tends to boost retail employment numbers during the holiday season.

REBO: What revisions do you anticipate to see in the November nonfarm payroll report, and what should the commercial real estate industry be on the lookout for in December?

Hicks: Most revisions are toward the historical mean, so plus-40,000 jobs is the most statistically likely outcome; plus-10,000 would be more reflective of a slower period of growth we are entering in 2019.  

Conway: The January and February jobs reports are always messy. January struggles to get retail temporary hiring/layoffs right, which is now amplified by e-commerce fulfillment warehouses, which also lay off seasonal workers after all the holiday package deliveries. And February is messy because that’s when the BLS does its annual benchmark revisions, which tie to more accurate state-level employment data.

Unfortunately, the BLS reports for December or January may report the unemployment rate falling to 3.5 percent, with wage inflation remaining above 3 percent on a year-over-year basis. Both these items will cause consternation at the December and January FOMC meetings. The Fed may very well continue a hike–pause–hike–pause pattern into the first half of 2019. If the Fed raises rates in December, it will pause in January. If the Fed pauses in December, it will hike rates in January.

One last important item to consider: In 2019, the composition of the voting members of the FOMC changes. Be thinking how an Atlanta Fed President Raphael Bostic rotating off the FOMC as a voting member and a St. Louis Fed President Jim Bullard rotating on impacts 2019 Fed rate hike decisions. The 2019 Fed/FOMC will not be the same composition as 2018. That has material implications the market has not yet digested in terms of how it impacts whether the Fed inverts the yield curve further. 

Aguirre: The U.S. has added an average of 206,000 jobs a month through the first 11 months of 2018, above the 182,000 pace during the same period last year. It is worth noting that monthly job growth of around 100,000 is all that is needed to keep the unemployment rate unchanged.

* Transportation & Warehousing — Worker shortages are impacting occupier/landlord location decisions for warehouses. CBRE Research has found that the transportation and warehouse sector is the No. 1 net taker of jobs from other industries, which is clearly putting upward pressure on wages. Expect the sector to look hard at automation to fill the gap.

* ManufacturingDespite some high-profile recent announcements of plant closures, the trend has been for more manufacturing and more re-shoring. The question is whether this trend is durable.

* Healthcare — Healthcare is expected to be the No. 1 growth industry over the next 10 years, and it’s no surprise that the sector had strong growth of 32,000 jobs last month. As a top-five user of office space, healthcare could replace tech as the No.1 user of new office space over the next decade.

* Retail/RestaurantsThe predicted demise of brick-and-mortar retail has been consistently disproven by recent monthly jobs reports. The November jobs report is no exception, with a gain of 39,000 jobs at retail, food services and drinking places. The strength in restaurants shows continued strength in experiential retail.

* Business ServicesOffice-using job growth remains the most important statistic in commercial real estate. The continued rise of professional and business services jobs is a positive sign because it generates demand for new office space.

— Taylor Williams


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