The era of easy money is about to end. The 211,000 jobs created in November make it all but certain the Federal Reserve will begin raising interest rates later this month — a move that could thwart Hillary Clinton’s hopes of winning the White House if the Fed inadvertently triggers a sharp economic slowdown.
Friday’s numbers showing unemployment unchanged at 5 percent were all but a formality for Federal Reserve Chairwoman Janet Yellen, who has been telegraphing in multiple appearances this week that the Fed plans to hike rates at its next meeting for the first time since June of 2006. Yellen would never say it out loud, but the purpose of a rate hike would be in part to tap the brakes on the economy and slow job creation so it does not lead to faster inflation.
That means that instead of gathering steam as Clinton attempts next year to replace President Barack Obama, the economy could be slowing, undercutting one of the Democratic front-runner’s main electoral advantages.
“Today’s number certainly paves the way for higher rates later this month,” said Jack Ablin, chief investment officer at BMO Private Bank. “At least for now, investors are taking the glass-half-full approach that the economy is strong enough to sustain those higher rates and that we have turned a corner and can put the crisis chapter behind us.”
But other analysts and many liberal Democrats believe the Fed may still be moving too early while wage gains remain soft and economic growth is still struggling to stay above 2 percent. They fear tighter monetary policy will choke off real progress on wage gains — the lack of which has left the electorate sour and dissatisfied — before the momentum gets started.
“They should wait. It is still too soon to declare victory,” said Elise Gould, senior economist at the progressive Economic Policy Institute. “We won’t be at full employment until we see durable acceleration of wage growth. My main message is that, yes, rates have been low for a long time, but the Fed should not move just so it can scratch the seven-year itch.”
Gene Sperling, a former top Obama aide and outside adviser to the Clinton campaign, tweeted on Friday that the Fed “should wait for stronger wage growth” before it hikes rates.
In addition to slowing job growth, analysts worry that the Fed will be boosting rates just as Europe, Japan and China are moving in the opposite direction, a global “divergence” that could drive up the dollar even further, hurting American exporters and possibly creating defaults abroad for companies whose debt is held in dollars.
Yellen has cautioned that even when the Fed hikes rates, it will do so slowly and reverse course if economic conditions deteriorate. But the United States central bank, for close to a decade the only functional economic policy-making operation in Washington, is moving into uncharted terrain.
“Since global central banks have been the only active policy-making entities, this divergence is much more significant than in the past and there are no compensating measures,” said Mohamed A. El-Erian, chief economist at Allianz.
Still, the jobs report showed a continued robust jobs market, one that does not appear to need the emergency monetary policy stance the Fed began during the worst of the financial crisis and has continued for the past six years.
And the economy could be headed to a jobless rate closer to 4 percent by Election Day 2016, something that will present a challenge to whoever emerges with the Republican nomination and must make the case for a change in direction. GOP analysts say the key will be to ignore the headline numbers and focus on the underlying economy.
“Republicans do not view the jobless number as telling the whole story, and that view is reinforced when you look at the right track/wrong track polling numbers on the economy,” said James Pethokoukis of the American Enterprise Institute. “People are not feeling it. Wage growth has been uneven. What Republicans have to do is ask, ‘Who thinks this is a booming jobs market? Who thinks this is a booming economy?’ We’ve seen what that looks like and this isn’t it.”
The White House nonetheless lauded the report on Friday. “The strong pace of job growth continued in November as the unemployment rate held at its lowest level since April 2008 and labor force participation ticked up,” Council of Economic Advisers Chair Jason Furman said in a blog post. “We have added more jobs over the past three years than in any three-year period since 2000, and wages are continuing to rise.”
The stock market also celebrated the news in early trading rather than focusing on problems associated with a rate-hiking campaign. The Dow rose more than 200 points in early trading Friday.
But there are other less encouraging signs for the economy that could be trouble for Democrats and boost Republicans promising faster growth and more jobs.
The U.S. manufacturing sector contracted in November, according to the latest data, hitting its worst levels since June of 2009. The services sector, which is much larger, expanded last month but at a slower place than in October, and the employment index in the sector fell more than expected.
November’s jobs numbers were down slightly from October’s revised 298,000, the Labor Department reported Friday. But November’s numbers have been revised upward by an average of 73,000 over the past five years, so Friday’s number could end up being closer to 300,000. And Yellen told Congress Thursday that even less-than-torrid job growth would show an economy with ample room to accommodate new workers.
“To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month,” Yellen said during an appearance before the Joint Economic Committee. Observers read that as a signal that any increase above 100,000 jobs would be sufficient to justify raising interest rates this month. The Fed’s Open Market Committee is set to make its rate decision when it meets Dec. 15-16.
The November jobs report contained mostly positive news. September and October’s numbers were revised upward by a combined 35,000. But average hourly private-sector earnings were up just 4 cents. In October, earnings were up 9 cents an hour.
Analysts had predicted the creation of about 190,000 jobs, unemployment of 5 percent and an increase in hourly earnings of 0.2 percent, according to a Bloomberg survey of economists.
Friday’s jobs report followed news last week from the Commerce Department that the nation’s gross domestic product increased 2.1 percent during the third quarter of 2015 — a significant decline from the second quarter’s 3.9 percent but an improvement on Commerce’s initial estimate of 1.5 percent. The Commerce Department’s next attempt to estimate third-quarter growth will be released Dec. 22.
A lingering sour note for the economy is that labor force participation remained low at 62.5 percent, up slightly from September and October’s 62.4 percent and the 62.6 percent rate for June, July and August. These figures put labor participation at the lowest level since the 1970s. But Yellen told Congress Thursday that those numbers may stay low for a while.
“I don’t think we should expect to see labor-force participation move up a great deal over time” because baby boomers are retiring, she said.