Real Wages Support the Consumer

Jeffrey Roach:

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's new in the macro landscape and a call to action for investors. First, real wage growth will keep the consumer shopping. Real wages continue to grow, giving consumers the ability to maintain spending habits despite those elevated prices. So here are the details. November payrolls increased by 227,000 after rising only a revised 36,000 in the previous month. Now, after receiving some additional surveys, October, payroll growth was revised upward, but still anemic and heavily impacted by a strike. The six-month average growth in payrolls, best way to look at it is 143,000, which is somewhat of a Goldilocks scenario. Not too hot, not too cold. Now, however, the number of long-term unemployed, that's those jobless for 27 weeks or more, that was up to 1.7 million, up from 1.2 million a year earlier, and accounted for 23.2% of all unemployed people. Employment and leisure and hospitality.

Jeffrey Roach:

Those are one of the lower-paid sectors, rose by 53,000 last month, significantly higher than the average monthly gain of 21,000. Average hourly earnings are up 4% from a year ago. That's rising faster than the pace of inflation. Second, the unemployment rate is expected to rise from here. The November unemployment rate rose to 4.2%. As we suspected, given the rise in those continuing to collect unemployment benefits. I show in this chart the positive relationship between the weekly continuing claims numbers and the monthly unemployment rate. So we shouldn't be surprised if the unemployment rate will continue to tick up from here. Now granted, a 4.2% is still historically very low, but the directional change is encouraging to markets that the labor market is indeed loosening. The recent rise in the unemployment rate should give the Fed an opportunity to cut in December, but if they do, the Fed will likely pause in January unless inflation stats decelerate meaningfully.

Jeffrey Roach:

Third, the Fed has a "cut and pause" strategy. The data-dependent Fed is struggling with weather-related distortions in the labor market. Base effects in the inflation prints. Now, depending on what will hold their focus, the Fed could cut this month, then pause in January. Or if they don't cut on the 18, they will cut next month. The labor market is the Fed's focus most likely, as they navigate through this inflationary regime. Investors should anticipate some significant revisions in the upcoming summary of economic projections. Fed officials will likely revise up their inflation forecasts, forcing them to slow down the pace of rate cuts in 2025. However, increasingly more individuals collecting unemployment benefits could be a dubious omen. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.