CICC: Employment is expanding at an accelerated pace, and the Federal Reserve continues to raise interest rates gradually

The Zhitong Finance App learned that CICC released a research report saying that the benchmark situation is still that the Federal Reserve will raise interest rates again in December and then wait and see. Considering that the risk of conflict between the US and Iran has declined after the midterm elections, and the room for a further sharp rise in oil prices is limited, the contribution of energy prices to inflation is expected to decrease in the future. At the same time, recent capital market fluctuations have marginally tightened financial conditions. This is equivalent to partially replacing the Federal Reserve's interest rate hike, so we don't think the Federal Reserve needs to further tighten the currency. Overall, the current austerity cycle is relatively moderate. The Federal Reserve will adopt a strategy of gradually raising interest rates and maintain a cautious attitude during the austerity process.

CICC's main views are as follows:

Non-farm payrolls in the US increased by 165,000 in October, far exceeding market expectations. A total of 84,000 people were revised in the first two months, showing an accelerated expansion. Structurally, employment growth has expanded from the service industry to cyclical sectors such as transportation, warehousing, and manufacturing; non-residential expansion and housing contraction in the construction industry confirm the differentiation between AI investment and real estate. The unemployment rate fell back to 4.1%, due to labor demand expanding faster than supply. The hourly wage growth rate has accelerated marginally, but wage pressure is concentrated in the blue-collar industry related to AI infrastructure, and the overall upward risk is still low. Maintaining the benchmark judgment that the Federal Reserve raised interest rates again in December and then switched to wait-and-see, next week's CPI is the key.

Non-farm payrolls in the US increased by 165,000 in October, greatly exceeding market expectations of 65,000. The data for the previous two months also improved markedly, indicating that the labor market is recovering strongly. Among them, new jobs were raised from 133,000 to 186,000 in August, and from 29,000 to 60,000 in September, for a total of 84,000. After the revision, non-farm payrolls increased by an average of 137,000 people per month in the past three months, which is significantly higher than the average of 48,000 people in the previous 12 months.

Structurally, labor force growth continues to expand from the service sector to the wider cyclical sector. The professional and commercial services industry added 70,000 people this month, which is significantly higher than the average of 15,000 people per month over the past 12 months; the education and medical industry added 53,000 people, the transportation and warehousing industry increased 25,000 people, and the manufacturing industry increased by 19,000. Employment growth no longer depends on a small number of lifestyle service industries, and AI investment continues to drive employment in the manufacturing industry.

The drag mainly comes from the leisure and lodging industry, construction industry, and information industry. The number of people in the leisure and lodging industry decreased by 13,000 in October, which is still a small fluctuation compared to the total employment scale of the industry. The construction industry as a whole decreased by only 30,000 people, but internal fragmentation was obvious: the total number of non-residential professional contractors and construction workers increased by about 11,000, while the number of professional residential contractors decreased by about 15,000. This is consistent with a pattern where demand for capital expenses such as data centers remains strong, and residential investment is still being suppressed by high interest rates. The slight decrease of 10,000 people in the information industry shows that the replacement effect of AI is still fermenting; however, the increase of 70,000 people in the financial sector indicates that white-collar employment has not generally shrunk, and the impact of AI on different jobs remains to be seen.

The unemployment rate fell back to 4.1%, and supply constraints helped stabilize the unemployment rate. The labor participation rate rose from 61.8% to 61.9% in October. The labor participation rate for people aged 55 and over rebounded, and the foreign-born labor force also increased marginally. Overall, the labor force population increased by 421,000, but the number of employed people increased by 463,000, driving the unemployment rate back from 4.2% to 4.1%. This means that the decline in the unemployment rate was not driven by workers' withdrawal from the labor market, but rather that the increase in demand for employment outpaced the expansion of labor supply. Given that the aging population and immigration policies limit labor supply growth, the unemployment rate will remain low while demand remains resilient.

Wage growth has accelerated marginally, but under the AI substitution effect, wage inflation pressure is generally manageable. The average hourly wage rose 0.4% month-on-month in October, and the annualized growth rate rose to 3.9% month-on-month in the past three months. Structurally, AI investment is driving demand for workers in non-residential construction and related manufacturing industries, and wages for some skilled jobs are rising rapidly. The Dallas Federal Reserve also previously stated that data center construction is driving up labor costs and attracting workers from other industries [1]. However, current wage pressure is still mainly concentrated in some industries where supply and demand are tight, such as blue-collar industries related to AI infrastructure, and AI has replaced some white-collar jobs, suppressing wage growth. As a result, demand for labor continues to expand, but a “wage-inflation” spiral is unlikely.

Strong non-farm payrolls data allowed the Federal Reserve to retain the option to raise interest rates in December. Next week's CPI is the key. The report further confirms that the labor market is in a state of full employment, the Federal Reserve's concerns about declining employment and growth have declined, and the policy focus is still on the inflation side. Next week's CPI data will provide the Federal Reserve with more information on inflation, which will also determine the attitude of officials on December and subsequent interest rate hikes.