It was “jobs week” again, with all significant employment-related data released this week, including JOLTs Job Openings, ADP Employment Change, and the BLS Employment Report, which contains Non-Farm Payrolls and Unemployment Rates. Here is a quick summary:
- JOLTs Job Openings: 7.74M / 7.37M / 7.48M
- ADP Employment Change: 146K / 184K / 150K
- Non-Farm Payrolls: 227K / 36K / 200K
- Unemployment Rate: 4.2% / 4.1% / 4.2%
(Actual / Last Month / Consensus)
In aggregate, the reports were very close to consensus and broadly showed a stable jobs market. And this is a good sign as we close out the year and begin to focus on 2025. However, even with solid numbers, there is often a piece of data at a deeper level that sparks interest, and this month was no exception.
That piece of data this month was the Participation Rate—an often-overlooked metric that can have a sizeable impact on the reported unemployment rate. In order to understand how the unemployment rate is affected, we need to know how it is calculated, so let’s get started.
The U.S. Bureau of Labor Statistics (BLS) defines “unemployed” as anyone over 16 who does not have a job, has looked for a job within the last month, and is currently available for work. In addition, the BLS defines the “labor force” as all people classified as employed or unemployed. Finally, the unemployment rate is calculated by dividing the total unemployed individuals by the total labor force.
Unemployment Rate = Number of Unemployed People / Labor Force
Seeing the equation likely helps simplify this, as it should be clear what drives the percentage. However, since the labor force comprises both employed and unemployed workers, you can have “good” reductions in the unemployment rate or “bad” reductions in the unemployment rate.
For instance, if there were 100 workers in the labor force, ten unemployed and 90 employed, the unemployment rate would be 10%, simple enough. Assume the total population is 120 people for a participation rate of 83% (100 ÷ 120). Now, if five people leave the workforce, and all are discouraged workers unable to find jobs, the unemployment rate would drop to 5.3% (5 ÷ 95), with the participation rate at 79% (95 ÷ 120). In this case, the decline in participation artificially reduces the unemployment rate, which is not a sign of a healthy labor market.
The flip side to the above scenario is the healthiest situation: an increasing participation rate with a decreasing unemployment rate. This is when the labor force is increasing, and the increase is driven by more employed individuals entering than unemployed individuals. So, where do we find ourselves today after the most recent report?
While the labor market continues to show some positive signs, unfortunately, we are seeing a decreasing participation rate and an increasing unemployment rate. The November numbers showed a decline of 0.1% in participation and a 0.1% increase in unemployment. In raw numbers, the labor force declined by 193K, and the unemployed increased by 161K, a double whammy for the unemployment rate.
Moreover, compared to November 2023, the participation rate has declined from 62.8% to 62.5%, while the unemployment rate has increased from 3.7% to 4.2%. Once again, the raw numbers tell an interesting story: the labor force increased by 159K, but the unemployed rose by 883K, from 6.2M to 7.1M.
And so, this is the primary reason why the Federal Reserve is highly likely to continue its rate cuts at its next meeting in two weeks. While inflation has shown a stubbornness in its path back to 2%, the Fed has indicated they still have confidence in the trajectory (only time will tell if they are correct). However, it is the labor market—specifically the dynamics between participation and unemployment—that is giving them enough signs of cooling to continue with the rate cuts.
Economy
- Equity markets were largely higher, and Bitcoin finally cracked the $100,000 mark. The S&P was up 1.0%, the Nasdaq was up 3.3%, and the small-cap Russell 2000 was down -1.1%.
- ISM Services PMI declined to 52.1 in November from 56 in October and well below forecasts of 55.5. The reading pointed to the slowest growth in the services sector in three months.
- U.S. initial jobless claims rose to 224K for the week ending November 30, from 213K in the previous week, marking the highest reading in six weeks.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Technology were the top performers, while Energy and Utilities lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased three basis points to 4.15% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
