Upside Surprise to Job Growth

On Friday, it was reported that non-farm payrolls increased by 203,000 in November, ahead of expectations that 185,000 jobs would be added. The unemployment rate fell to 7.0%, its lowest level since November 2008. The November result was roughly in-line with recent gains – the four-month average is 204,000. Since the Fed began its latest round of asset purchases in September 2012, the unemployment rate has fallen from 8.1% in August 2012, and, on average, 188,000 jobs per month have been created.

Although the labor participation rate increased modestly from 62.8% in October to 63.0% in November, that rate remains at levels not seen since 1978 when large numbers of women were entering the labor force for the first time.

Civilian Labor Force Participation Rate

The large drop in the labor participation rate likely remains a concern for the Federal Reserve.  While 2.1 million unemployed workers found jobs in November, another 2.4 million stopped looking. This represents the 43rd consecutive month the number of workers dropping out of the workforce surpassed the number that found new jobs. In addition, the number of long-term unemployed workers moved marginally higher, as did the average number of weeks that job seekers have been out of work.

Overall, the combination of a lower unemployment rate with a higher labor participation rate is a positive outcome. We continue to believe the Fed will start tapering its asset purchases in the near future. While December may be too soon, as long as the data continues to be positive, the Fed is likely to begin to scale back the pace of its asset purchases at some time over the next several months. On the other hand, we don’t expect the Fed to start raising interest rates in the near future.

Against this backdrop, we continue to believe that our focus on using bottom up, fundamental analysis to select individual securities for client portfolios is the best approach in this environment.