A Strong NFP Is Bad News - Fed’s Tightening Story Is Not Over

December 5, 2022

| Fullerton Markets

A Strong NFP Is Bad News - Fed’s Tightening Story Is Not Over">

Job growth was better than expected in October despite Federal Reserve’s interest rate increases aimed at slowing a relatively strong labour market.

Nonfarm payrolls grew by 261,000 for the month while the unemployment rate increased to 3.7%, the Labour Department reported Friday. Those payroll numbers were better than the Dow Jones estimate for 205,000 more jobs but worse than the 3.5% estimate for the unemployment rate.

In normal times, strong job gains and rising wages would be considered good. But these days, they are exactly what the US economy does not need as policymakers try to beat back an inflation problem that would not seem to disappear.

Negative news means good news, but good news also means bad news. The Fed tightening is pretty much uniformly dominant in investors' concerns. The Fed will tighten less when they get bad news on the economy. Although the number was better than expected, it still marked the slowest pace of job gains since December 2020. There is reason to have a little hope that we are starting to see some of the froth come out of the jobs market.

The unemployment rate rose 0.2 percentage points even though the labour force participation rate declined by one-tenth of a point to 62.2%. An alternative measure of unemployment, including discouraged workers and those holding part-time jobs for economic reasons, also increased to 6.8%.

September's jobs number was revised to 315,000, an increase of 52,000 from the original estimate. August's number moved lower by 23,000 to 292,000.

The new figures come as the Fed is trying to bring down inflation, moving at an annual rate of 8.2%, according to one government gauge. Earlier this week, the central bank approved its fourth consecutive 0.75 percentage point interest rate increase, taking benchmark borrowing rates to a range of 3.75%-4%.

Those hikes are aimed partly at cooling a labour market where there are still nearly two jobs for every available unemployed worker. Even with the reduced pace, job growth has been well ahead of its pre-pandemic level, in which monthly payroll growth averaged 164,000 in 2019.