The U.S. economy created far fewer jobs than expected in November, in a sign that hiring started to slow even ahead of the new Covid threat, the Labor Department reported Friday.

Nonfarm payrolls increased by just 210,000 for the month, though the unemployment rate fell sharply to 4.2% from 4.6%, even though the labor force participation rate increased for the month to 61.8%, its highest level since March 2020.

The Dow Jones estimate was for 573,000 new jobs and a jobless level of 4.5% for an economy beset by a chronic labor shortage.

A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons dropped even more, tumbling to 7.8% from 8.3%. The household survey painted a brighter picture, with an addition of 1.1 million jobs as the labor force increased by 594,000.

“This report is a tale of two surveys,” said Nick Bunker, economic research director at jobs placement site Indeed. “The household survey shows accelerating employment gains, workers returning to the labor force, and low levels of involuntary part-time work. The payroll survey shows a significant deceleration in job growth, particularly in COVID-affected sectors.”

“The underlying momentum of the labor market is still strong, but this month shows more uncertainty than expected,” he added.

Leisure and hospitality, which includes bars, restaurants, hotels and similar businesses, saw a gain of just 23,000 after being a leading job creator for much of the recovery. Though the sector has regained nearly 7 million of the jobs lost at the depths of the pandemic, it remains about 1.3 million below its February 2020 level, with an unemployment rate stuck at 7.5%.

Following the disappointment, markets initially shrugged off the numbers, but then turned negative after the open.

Initial jobs tallies this year have seen substantial revisions, with months showing low counts initially often bumped higher. The October and September estimates were moved up a combined 82,000 in the report released Friday.

Sectors showing the biggest gains in November included professional and business services (90,000), transportation and warehousing (50,000) and construction (31,000). Even with the holiday shopping season approaching, retail saw a decline of 20,000.

Worker wages climbed for the month, rising 0.26% in November and 4.8% from a year ago. Both numbers were slightly below estimates.

Fed ready to change policy

Policymakers have been watching the employment figures closely to gauge how close the economy is to a full recovery from the depths of the pandemic. The U.S. suffered its shortest but steepest recession in the early days of the Covid-19 breakout and has been on a progressive but volatile path since.

Federal Reserve officials put a new wrinkle into the picture this week when they indicated that the measures they instituted to support growth could be coming to an end sooner than expected.

In congressional testimony earlier in the week, Fed Chairman Jerome Powell said he expects the central bank’s policy committee to discuss at its meeting this month stepping up the level at which it is tapering its monthly bond purchases. Powell said he sees the unwinding to conclude “a few months” sooner than expected, a move that would open the possibility for interest rate hikes.

“The disappointing 210,000 gain in non-farm payrolls in November suggests the labor market recovery was faltering even before the potential impact of the new Omicron variant, possibly as a result of the rising infection rates in the Northeast and Midwest,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. “Nevertheless, the Fed will still push ahead with its plans to accelerate the pace of its QE taper at this month’s FOMC meeting.”

San Francisco Fed President Mary Daly backed up Powell’s comments in remarks Thursday, saying that inflation that is stronger and more durable than expected is creating the need to rethink policy. She said the Fed should “at least, you know, think about raising the interest rate” and accelerating the taper pace.

Daly also hinted that the summary of economic projections to be released this month, in which officials show their expectations for the future, likely will point to interest rate hikes pulled forward into 2022. Markets currently expect the Fed to enact at least two quarter-percentage point increases next year.

St. Louis Fed President James Bullard added to the chorus on Friday, saying the economy as measured by GDP has recovered fully and can operate with less policy stimulus, particularly considering the pace at which inflation is running.

“These considerations suggest, on balance, that the Federal Open Market Committee should remove monetary policy accommodation,” Bullard said.

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Job growth is expected to have been strong in November, and employers likely continued to boost wages to attract and retain workers in an incredibly tight labor market.

Economists expect 573,000 jobs were created last month, up from 531,000 in October, according to Dow Jones. The unemployment rate is expected to have declined to 4.5% from 4.6%, and average hourly wages are expected to have increased by 0.4% on a monthly basis, or 5% year over year.

“It looks like it was a really good month, and we’ll see if we can sustain it, with some pullback, which is natural with concerns about omicron,” said Diane Swonk, chief economist at Grant Thornton. “But at the moment, we’re still coming off what was an incredible month, especially for travel and tourism.”

The jobs data, expected Friday at 8:30 a.m. ET, will be an important input for the Federal Reserve at its Dec. 14 and 15 meeting. Earlier this week, Fed Chairman Jerome Powell said the central bank could speed up the tapering of its $120 billion a month bond-buying program, which it put in place to prop up the economy during the pandemic. The Fed will discuss the acceleration at its December meeting, he said.

The Fed’s dual mandate

Full employment is one of the Fed’s dual mandates, so economists will be closely watching the participation rate in the November report to see if it rises. This metric is the percentage of the eligible workforce that is employed or actively seeking work, and it was 61.6% in October.

Swonk expects an above-consensus 750,000 jobs were added in November, and she expects the unemployment rate fell to 4.4%. Swonk said wage growth should be solid, as employers attempt to attract workers in the face of demand from Amazon and other employers that have raised wages.

“It’s a hot job market and there’s a surge in demand that’s like nothing we’ve ever seen,” she said. She noted that job openings are up 55% from the February 2020 level, according to the online jobs site Indeed.

“There’s no immigration. It’s fallen off a cliff. The pandemic has accelerated retirements and hurt participation among some groups that normally need to participate the most,” she said. “It’s far from perfect. It’s a job market that has a collision of demand surging with constraints on supply.”

Wage gains were likely across the board in November. “We’ll see gains on the low end, but the higher end, professional services, is really hot,” Swonk said.

Luke Tilley, chief economist at Wilmington Trust, expects 300,000 jobs were created in November, based on private sector data and the weekly unemployment claims data.

He expects the hiring trend is strong and will remain so.

“Our expectation is 500,000 jobs per month on average over 12 months going forward, but there’s going to be fluctuations, with the virus and ups and downs of different industries,” said Tilley.

Greater context behind the jobs report

Tilley said the Fed will be looking for the reasons behind the jobs report’s weakness or strength, as it tries to assess what will be normal for the labor market post-pandemic. “If it’s weak because there’s still no labor supply, that’s very different for them than weakness because demand is petering out,” he said. “I think the Fed, the FOMC, is probably spending more time getting their arms around what does a full recovery of the labor market mean.”

He said the Fed will have to adjust to a lower participation rate. “That has implications for the unemployment rate and should we even be comparing it to the pre-pandemic unemployment rate,” he said.

But the jobs report will also be judged by investors, with an eye on what it means for Fed policy. Financial markets have been sensitive to any nuances that could help determine the central bank’s timeline on completing its bond-buying program, which now is expected to end in June 2022.

Once the bond purchases end, the door would be open for the Fed to raise interest rate hikes.

Swonk has been expecting the Fed to speed up the tapering of its bond purchases because of higher than expected inflation, so the wage portion of the employment report will also be very important. “We’re not getting a wage price spiral…but that is what the Fed is worried we could get to,” she said.

David Petrosinelli, senior trader at InspereX, said the jobs report will not likely have a big impact on the market unless it is very strong or very weak.

“I think this market is much more cued up for a stronger number, and that tells me rates have some room to run,” he said. Petrosinelli pointed to the yield on the benchmark 10-year Treasury, at 1.44% Thursday afternoon. Yields move opposite price.

“You can look back to last week and that was 1.70%,” he said, referring to the 10-year yield. “I think that was the upper bound there. If you get a really strong number, we could go right back there, albeit bounded by the sideshow of this new variant.”

Yields moved sharply lower after initial reports of the omicron variant of Covid last Friday.

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Initial claims for unemployment insurance rose last week but held at levels consistent with how the job market looked before the Covid-19 pandemic devastated the U.S. employment picture, the Labor Department reported Thursday.

First-time filings for the week ended Nov. 27 totaled 222,000, less than the 240,000 Wall Street expected. That was higher than the 194,000 from the previous week, but that total, the lowest since 1969, was revised even further down from the initial 199,000 reported.

The totals are the product of heavy seasonal adjustments, though the unadjusted number was actually lower, at 211,896.

The report comes amid signs of an increasingly tight labor market, with workers leaving their positions for new jobs at the highest level on record and with hiring persisting at a brisk pace.

In addition to the brightened outlook for initial claims, continuing claims fell by another 107,000 and are now below 2 million for the first time since the early days of the pandemic. The last time continuing claims, which run a week behind the headline number, were lower than the current 1.96 million was March 14, 2020.

Virginia and Texas combined to see more than 15,000 fewer claims filed for the week, according to unadjusted data.

Thursday’s report comes a day ahead of the closely watched nonfarm payrolls count from the Bureau of Labor Statistics.

That tally is expected to show an addition of 573,000 new jobs in November, following a gain of 531,000 in October. The unemployment rate is expected to edge lower to 4.5%.

Correction: Jobless claims for the previous week were initially reported as 199,000. An earlier version misstated the figure.

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