three takeaways from a cooling labor market

The Bureau of Labor Statistics (BLS) has recently released a significant tranche of employment data: a full report for November, and a delayed partial report from October. While it’s a messy dataset due to the government shutdown, there are some important learnings.

Here are the three major takeaways.

1. The unemployment rate has risen to 4.6%, though this was driven more by labor market entrants than by layoffs.

Perhaps the most eye-catching piece of the latest report was that the overall unemployment rate, which has thus far remained stable at historically low levels, rose to 4.6% in November from 4.4% in September (October’s rate was not published). This is up meaningfully since the 4.2% seen this time last year, and marks the highest level since October 2021 as the economy emerged from the pandemic shutdown.

Reassuringly, this uptick in joblessness largely came more from people entering the labor force to seek a job, rather than layoffs; permanent layoffs in November actually ticked lower. 

At the same time, nearly across the board, labor metrics look to be softening. The U6 unemployment rate, which includes those working part-time only because they cannot find full-time employment, is up nearly a full percentage point to 8.6% from 7.7% last year. The share of long-term unemployment (jobless for 27 weeks or more) and youth unemployment (ages 16-24) are both similarly elevated year-over-year. And wage growth, which has managed to outpace inflation over the past two years, slowed to 3.5% from 4.2% over the same period.

2. DOGE-related cuts to government employment are by far the largest driver of job losses this year.

Of the fourteen employment sectors defined by the BLS, half have recorded a net employment loss year-to-date through November. But across these seven net-negative sectors, 47% of the 402,000 in job losses have come from cuts to government employment, largely related to the Department of Government Efficiency (DOGE) efforts. This provides some room for optimism that much of the job losses have not been for economic reasons but rather driven by policy.

On the other hand, the majority of gains were driven by sectors that are supported by ongoing structural forces. Of the seven sectors that added employment, 71% of the 892,000 jobs gained this year have come from the private education and health services sector, which has been buoyed considerably by an aging demographic. Outside of this sector, job creation has been relatively modest.

3. Even accounting for the “DOGE effect”, the downward trend is unmistakable.

October registered a surprisingly large net loss of 105,000 jobs. Of those, 98,000 came from DOGE-related cuts to government employment. 

That being said, there were net job losses in three of the last six months, with the majority not attributable to DOGE. And when taking an averaged view, hiring is clearly cooling in markets. The three-month moving average of job growth fell from 232,000 at the beginning of this year to just 26,000 in November.

Looking ahead, we expect further labor market weakness to materialize in the coming months. At its recent December 10th meeting, the Federal Reserve cited its belief that BLS may still be overestimating recent job creation by up to 60,000 per month, due to issues with its statistical model that is currently being revised. That would be at a similar scale to a set of downward revisions that already drew considerable attention over the summer. 

Given that monthly job creation has averaged just 48,500 so far this year, a further adjustment of that magnitude would suggest the true underlying number is not just below average, but potentially negative. 

We will see the specifics in the coming months, but until then the signal is clear: the heat has left the labor market, and we are settling into a much quieter period for hiring.