The headline number job gains of just 210,000 in November was a disappointment. It was less than half of our 500,000 forecast and the 525,000 consensus forecast. If monthly job gains hold at that rate, the U.S. economy won't regain the jobs lost from the pandemic until sometime in the fourth quarter of 2025. Although the employment rates for all large sectors remain below their pre-pandemic levels, the leisure and hospitality sector is the laggard, at almost 8% below pre-pandemic levels, while the goods producing industry is at the top, at less than 2% away from its pre-pandemic level (chart 1).

The continued climb in wages is also disconcerting for both businesses and the Federal Reserve. Average hourly earnings increased by 0.3% month over month in November and were up an astonishing 4.8% on a year-over-year basis. And though labor costs are climbing higher, workers are not necessarily seeing more in their bank accounts. As overall inflation hit a 31-year high in October, real wage gains are negative, and households' purchasing power is being squeezed.

Chart 1

Underneath the headline jobs number was some good news. The unemployment rate fell to 4.2% from 4.6%, closer to its pre-pandemic rate of 3.5%. With 1.1 million more people saying that they found a job, the number of unemployed workers fell to 6.9 million in November. Also, 542,000 people said that they are no longer unemployed, while 594,000 people joined (or rejoined) the labor force, perhaps because they found a job. More people entering the workforce and getting a job is a good combination. Also promising was the large 1.2% drop in the unemployment rate for Black Americans to 6.7% from 7.9% in October. The Hispanic unemployment rate also fell to 5.2% from 5.9% in October. Although it narrowed some in November, the gap between those rates compared with white and Asian unemployment rates of 3.8% and 3.7%, respectively, remains wide.

Chart 2

That said, the jobs market has a long way to go before it has fully healed. Though the labor participation rate increased by 0.2 percentage points to 61.8%, this is still a 45-year low and below its pre-pandemic rate of 63.3%, a 38-year low. Accounting for all the people who dropped out of the labor force since February 2020, the adjusted unemployment rate is 5.7%.

Chart 3

Since the pandemic began, 3.45 million people are still not working. Of these, 1.05 million (30.5%) are unemployed, but an even larger 2.4 million (69.5%) have left the labor force entirely. When controlling for the age effect, we found that 42% of the drop in the labor force is structural, largely from the aging workforce, many of which have retired earlier because of the pandemic. Indeed, in the November Bureau of Labor Statistics jobs report, 37% of the labor exits since February 2020 are from people 55 and older. They aren't very likely coming back. Other structural factors include the skills gap, which only worsened from the pandemic.

The remaining 58% drop in the labor force is likely temporary, largely tied to the pandemic. Childcare concerns may still be having an impact, as children under five years are not eligible for vaccines. Fear of contracting the virus is a factor, which could increase with the emergence of the omicron variant. The location mismatch remains a concern for many people who have moved away from crowded cities. The location mismatch is a bigger concern for those jobs in customer-facing industries, which helps explain why that industry is still struggling to get the workers they need.

Of the 2.4 million people out of the workforce, 48% (1.15 million) are prime-age workers (ages 25 to 54). Of those prime-age people who left the workforce, 68% are women. Younger workers, ages 16 to 24, have returned to the workforce at a faster pace, accounting for a smaller 12% of the people who left the market since the pandemic. But even here, women trail men in re-entry. Women ages 16 to 24 make up 12% of labor market exits since the pandemic, while the percentage of men ages 16 to 24 who are employed is now above pre-pandemic levels.

Chart 4

Inflation Erodes Consumers' Purchasing Power And Moods

Consumer spending remained strong in October, with personal consumption expenditures (PCE) up by 1.3% in nominal terms and 0.7% in real terms from September levels, according to the U.S. Bureau of Economic Analysis. While disposable personal income edged down by 0.3% from last month, the personal saving rate fell below the 2019 average of 7.6% for the first time since the start of the pandemic to 7.3% in October, indicating the unwinding of savings accumulated during the lockdown period.

Chart 5

The 0.6 percentage point discrepancy between nominal and real PCE monthly growth rates reflects heightened inflation, which has dampened consumer sentiment in the past few months. Index of Consumer Sentiment from University of Michigan declined further to 67.4% in November from 71.7% in the previous month, hitting a decade low amid growing complaints about inflation from respondents. As financial supports from the stimulus checks wane and prices of energy, food, and other groceries climb, households are increasingly worried about the erosion of their living standards.

Chart 6

The Fed Blinked

The Fed closely follows year-over-year growth of PCE as a measure of inflation, which hit a 30-year high in October. The headline PCE price index grew 5.0% from the same time last year, and the core PCE price index grew 4.1%. The tight goods market and recovery of the service sector continued to push prices higher.

With PCE inflation hitting a multi-decade high, the Fed has indicated that it will not wait to get further behind the curve if price gains prove to be not so transitory as it had expected. Indeed, Fed Chair Jay Powell said the Fed will even retire its use of the word transitory. According to the minutes from the November Federal Open Market Committee (FOMC) meeting, participants have already judged that "inflationary pressures could take longer to subside than they had previously assessed."

While minutes from the November FOMC meeting indicated that participants generally anticipate that "the inflation rate would dimmish significantly in 2022," they noted increased uncertainty to this assessment, with many participants pointing to factors that "might suggest that elevated inflation could prove more persistent." That said, the Fed will likely speed up tightening sooner than expected. After the Fed reduces purchases by $15 billion a month, it seems prone to speed up tapering, likely reaching zero by March 2022. This would give the Fed room to raise the federal funds rate sooner in 2022--maybe even sooner than our current forecast for a September hike. Another rate hike soon after the midterm election is an increasing possibility.

The Fed could also be forced to move quickly to contain elevated inflation in 2022 if price gains prove not to be largely transitory. The Fed's even tighter monetary policy will eventually tame price readings, but not without economic growth slowing as well. How sharp of a slowdown it is will depend on how big the Fed's inflation battle becomes.

As the U.S. heads into the winter season, the omicron variant is emerging as another factor that may constrain economic growth and further disrupt the supply chain. However, the U.S. economy seems to have adapted from past outbreaks, and as Powell said, "we've kind of learned to live with it." He noted in June that the impact to U.S. growth has been less severe with each wave, and it seems reasonable to assume this time will be no different. This suggests that the next wave of COVID-19 likely won't slow the Fed's plans to contain elevated inflation in 2022.

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