November jobs report likely to give Fed go-ahead to raise interest rates

Forecast calls for 200,000-plus increase, continued wage gains

Getty Images

An improved labor market is giving skilled employees more leverage to seek higher pay.

WASHINGTON (MarketWatch) — The Federal Reserve appears hell bent on raising interest rates for the first time in a decade and only a lousy U.S. jobs report could put a freeze on its plans.
Don’t bet on it, though. With job openings near a record peak and hiring at an 11-month high, employment gains in November will likely be good enough to allow the Fed to act before year end.
Economists polled by MarketWatch project a 205,000 increase in newly hired workers, following a gain of 271,000 in October. That month’s tally, the biggest of 2015, eased worries after hiring briefly slowed at the end of the summer.

The unemployment rate, meanwhile, is forecast to hold steady at 5%. Don’t be surprised if it dips below that psychological barrier to 4.9%, but don’t pay it much heed, either.
“Whether it’s 5% or 4.9% doesn’t tell us anything more,” said Richard Moody, chief economist at Regions Financial. “ It just tells us we are paring down slack in the labor market.”
The government will issue the much-anticipated November employment report on Friday morning.
What could cause the central bank to waffle on rates again? Only a shockingly poor report, say fewer than 100,000 new jobs. Even then Fed VIPs would probably have to see warning signs in other surveys of the U.S. economy.
Evidence of a softening economy is hard to find.
Sure, energy producers and manufacturers are struggling in the face of cheap oil and a strong dollar. Yet the huge U.S. service sector — retailers, restaurants, banks, hospitals and the like — is spitting out plenty of new jobs. The construction industry continues to expand at a moderate pace. And even governments are spending a bit more after years of ultra-tight budgets.
The steady improvement in the U.S. economy and the well-being of consumers is showing up in paychecks. Average hourly earnings rose sharply in October to push the increase over the past 12 months to a six-year high of 2.5%. Overall incomes climbed 0.4% last month, the latest in a string of solid gains.
The rise in wages matches reports of scattered labor shortages and increasing pressure on companies to boost pay.
That’s not to say wage growth will accelerate quickly to the annual 3% to 3.5% levels typical at the height of a recovery. Companies have found a variety of ways to tame labor costs, for one thing, and they are slower to hire than they are to post job openings, a sign they will only add to payrolls if they find a great fit.
Still, the Fed is likely to view consistent wage growth, even in the 2.5% range, as a call to arms. Steady income gains are the fuel for strong consumer spending, the engine of the U.S. economy.
Another cue for the Fed will come this week from a report on the U.S. service sector compiled by the Institute for Supply Management. The ISM’s non-manufacturing index has been hovering near a 10-year high since midsummer and economists predict a similarly strong reading in November.
The strength shown by service-oriented companies has more than offset weakness among American manufacturers, a divide that shows little sign of closing.
”You are going to see continue to see those industries pulling in separate directions,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics.
No matter. Manufacturing is important to the U.S., but not nearly as influential as it was a few decades ago. The economy has enough momentum to keep the Fed on course to raise rates for the first time since 2006, even if the nation’s growth is still fairly slow by historical standards.
“The plow-horse economy continues to move forward, just not by leaps and bounds,” said chief economist Brian Wesbury of First Trust.