U.S. Economy Adds Whopping 321,000 Jobs In November, But Key Indicators Won’t Give

The U.S. economy created 321,000 jobs in the month of November, easily beating the 230,000 economists expected and the biggest increase since January 2012, according to the Labor Department.

The results, which vary widely from the private sector report Wednesday conducted by independent payroll processor ADP, show a solid month of employment growth that will definitely weigh heavy on the Fed’s decision to hike interest rates.

The headline unemployment rate was unchanged at 5.8 percent and the number of unemployed persons was little changed at 9.1 million. Economists had forecast the unemployment rate would hold steady from a month earlier, the unemployment rate for adult men rose to 5.4 percent.

The number of long-term unemployed — or, those jobless for 27 weeks or more — was little changed from the month prior at 2.8 million in November. These individuals accounted for 30.7 percent of the total unemployed. Civilian labor force participation remains abysmal at 62.8 percent, a thirty-plus year low, while the employment-population ratio, which is less cited but a more important indicator, remains at a terrible 59.2 percent.

With such a vibrant month of job creation, we should have seen better gains on these two measurements, but both have remains unchanged in November. The employment-population ratio is up by just 0.6 percentage point year-over-year.

November was the tenth consecutive month in which the U.S. gained 200,000 or more jobs, but the economy must add 250,000 jobs on average monthly to keep pace with population. Fortunately, jobs created in September and October were revised upward by 44,000 jobs, and average hourly wages in November rose more than anticipated.

However, 6.9 million workers are employed part-time because they cannot find full-time work or have had their hours cut back, while 698,000 discouraged workers remained convinced there are no jobs available to them. A total of 2.1 million persons remain marginally attached to the workforce.

The November numbers were expected to be stronger-than-usual due in part to seasonal hiring for the holidays, specifically among package delivery companies such as FedEx (NYSE: FDX) and UPS (NYSE:UPS).

While labor markets appear to be strengthening — if we just look at the headline unemployment rate — the Fed says other labor market indicators suggest a slower recovery for many U.S. workers. Average hourly wages have been stagnant for months and increased by just .9 cents in November, a key factor that has kept inflation running well below the Fed’s target rate of 2 percent. Over the past year, average hourly earnings have increased by just 2 percent, nowhere near the Fed’s target.

Wages are now the key indicator for economists attempting to determine when the Fed will start raising interest rates.

The Fed says it won’t start raising rates until it reaches its dual mandate of full employment and price stability, but neither targets seem achievable in the short-term. So, they will just modify the two targets if need be. The central bank has defined the former as an unemployment rate in a range of 5.2 percent – 5.6 percent,  and the latter as an annual inflation range of 1.7 percent – 2 percent .

The unemployment rate is likely to drop into that desired range in early 2015 given the weak labor force participation rate, but the inflation target is a clear challenge. Inflation isn’t likely to move higher until wages go up significantly, and most economists say that is likely not going to happen until late 2015.

However, there is a danger to rapid wage growth — inflation. If and when wages rise too quickly, then it will lead to runaway inflation and inevitably eat up corporate and small business profits.

Wage growth and other inflationary indicators are currently — and, should be — at the heart of the growing debate within the Fed over the timing of rate hikes. The consensus among Fed economists is that hikes should and will occur in mid-2015, early enough to stave off runaway inflation, while remaining low long enough to continue providing stimulus to what is still fundamentally a very fragile economy and an even more fragile recovery.

If and when interest rates increase, which they will with or without the Fed’s control, it will raise borrowing costs for not only businesses, but for a government that just surpassed $18 trillion in total federal debt. It will make borrowing more expensive for consumers, as well, including transactions on a mortgage or a car loan. It will be extremely difficult for small businesses, too, to get a loan for expansion.