CICC: Accelerated Employment Expansion, Fed Maintains Gradual Rate Hikes

Zhitong Finance APP reports that CICC has released a research note stating that the baseline scenario remains that the Federal Reserve will raise rates once more in December, and then shift to a wait-and-see approach. Considering that the risk of US-Iran conflict has decreased after the midterm elections, and there is limited room for a further sharp rise in oil prices, the future contribution of energy prices to inflation is expected to decline. Meanwhile, recent volatility in capital markets has led to marginal tightening of financial conditions, which partly substitutes for some Fed rate hikes. Therefore, we believe the Fed does not need to rush toward further monetary tightening. Overall, this tightening cycle is relatively mild, and the Fed will adopt a gradual rate hike strategy, maintaining a cautious stance during the tightening process.

CICC’s main viewpoints are as follows:

In October, non-farm payrolls in the US increased by 165,000, far exceeding market expectations. Data for the previous two months was jointly revised up by 84,000, indicating accelerated expansion. Structurally, job growth has extended from the service sector to cyclical sectors such as transportation, warehousing, and manufacturing; in construction, non-residential is expanding while residential is contracting, evidencing the divergence between AI investment and real estate. The unemployment rate fell to 4.1%, due to labor demand expanding faster than supply. Wage growth marginally accelerated, but wage pressure is concentrated in blue-collar industries related to AI infrastructure, so the overall risk remains low. We maintain our baseline judgment that the Fed will raise rates once more in December and then pause, with next week’s CPI as the key indicator.

In October, US non-farm payrolls increased by 165,000, well above the market expectation of 65,000. Data for the previous two months was also significantly revised upwards, showing strong momentum in the labor market recovery. Specifically, August jobs added were revised up from 133,000 to 186,000, and September’s from 29,000 to 60,000, for a combined upward revision of 84,000. After these revisions, non-farm jobs increased by an average of 137,000 per month over the past three months, well above the 48,000 average in the preceding 12 months.

Structurally, labor growth continues to extend from services to the broader cyclical sectors. Professional and business services added 70,000 jobs this month, significantly higher than the 15,000 average per month over the past 12 months; education and healthcare added 53,000, transportation and warehousing added 25,000, and manufacturing gained 19,000. Job growth is no longer reliant on a few consumer-facing service industries, and AI investment continues to drive demand for labor in manufacturing.

The main drags came from leisure and hospitality, construction, and information industries. In October, leisure and hospitality lost 13,000 jobs, a relatively small fluctuation compared to total industry employment. The construction sector as a whole shed just 3,000 jobs, but with notable divergence within: non-residential specialty contractors and construction jointly added about 11,000 jobs, while residential specialty contractors lost about 15,000. This aligns with robust capital spending (such as data centers) and persistent pressure on residential investment from high interest rates. The information sector saw a slight drop of 1,000 jobs, indicating the AI substitution effect continues; however, the financial sector added 7,000 jobs, showing that white-collar employment has not generally contracted, and AI’s impact on various roles is yet to be fully observed.

The unemployment rate fell to 4.1%, with constrained supply helping stabilize unemployment. In October, the labor force participation rate rose from 61.8% to 61.9%, with participation in the 55+ age group rebounding and a marginal increase in foreign-born labor. Overall, the labor force increased by 421,000, but employment rose by 463,000, pushing the unemployment rate down from 4.2% to 4.1%. This means the decline in unemployment was not driven by workers leaving the labor force, but by employment demand outpacing labor supply growth. Considering population aging and immigration policies limiting labor supply growth, with resilient demand, the unemployment rate is expected to remain low.

Wage growth marginally accelerated, but with AI’s substitution effect, overall wage inflation pressure is manageable. In October, average hourly earnings rose 0.4% month-on-month, and the annualized rate over the past three months climbed to 3.9%. Structurally, AI investments are driving labor demand in non-residential construction and related manufacturing, pushing up wages for certain technical roles. The Dallas Fed previously pointed out that data center construction is driving up labor costs and attracting workers from other sectors[1]. However, current wage pressures are still mainly concentrated in relatively tight sectors, such as blue-collar industries linked to AI infrastructure, while AI substitutes for some white-collar roles, restraining wage growth. Therefore, while labor demand continues to expand, the likelihood of a “wage-inflation spiral” remains low.

Strong non-farm data keeps the Fed’s option open for a December rate hike, with next week’s CPI as the key. This report further confirms the labor market is at full employment, reducing the Fed’s concern over downside risks to employment and growth, and the policy focus remains on inflation. Next week’s CPI data will provide the Fed with more information on inflation, which will also shape officials’ attitudes toward a December and subsequent rate hikes.