Labor demand was strong and continued to expand in November.

Nonfarm payroll employment rose 263 thousand for the month, with private payrolls expanding 221 thousand. Both increases exceeded expectations.

The unemployment rate remained at 3.7%, while labor supply is still constrained due to larger-than-normal retirements stemming from the pandemic. As evidence of the ongoing restraint on labor supply, the labor force participation rate declined to 62.1% in November; it is little changed since January and is 2.3 percentage points lower than immediately before the pandemic.

Labor markets are still unusually tight even after some moderation from record high levels of job vacancies and quits. Tight labor markets are continuing to exert pressure on labor costs: average hourly earnings accelerated in November, rising at a 6.8% annual rate on the month and at a 5.8% pace over three months.

The outlook for fourth-quarter GDP growth is weak despite some positive surprises in monthly data in previous weeks. Largely because the trade deficit widened sharply in October, this week we cut 0.5 percentage point from our forecast of fourth-quarter GDP growth, to +0.3%. We expect a mild recession to begin this winter and continue until approximately the middle of 2023. The softening of demand will relieve pressure on tight labor markets over time.

Inflation eases

Core inflation did ease in October, but it remained far above the Fed's target. The core personal consumption expenditures price index rose 0.2% in October, benefiting from a sharp decline in used vehicle prices and declines in other core goods categories.

Core services inflation remains high in part because of soaring rents that are rising at approximately a 9% annual rate. The 12-month core PCE inflation rate was 5.0% in October, down from 5.2% in September.

With inflation running far above the Fed's 2% target and only tentative signs of a rebalancing of demand and supply in labor markets, the Fed remains on course to raise interest rates to a substantially restrictive level.

The future at 5%

We expect the Fed to slow the pace of rate hikes beginning this month and for it to raise the target for the federal funds rate over the next several months by approximately 1 percentage point. We expect the Federal Open Market Committee to raise the funds rate target 50 basis points on Dec. 14 and by 25 basis points at the two subsequent policy meetings in February and March. These increases would bring the upper end of the target range to 5%, where we assume it will remain for an extended period as inflation subsides.

Fed Chair Powell's remarks at an appearance on Nov. 30 at the Brookings Institution reiterated key themes from his press conference on Nov. 2, including an imminent downshift in the pace of rate hikes, higher expectations for the peak level of interest rates relative to forecasts Federal Reserve policymakers submitted in September, and his perspective that a restrictive policy stance will be appropriate for an extended period.

This week's economic releases:

• Manufacturers' shipments, inventories and orders (Dec. 5): We estimate inventories rose 0.5% in October. Orders for durable goods were already reported to have increased 1.0%.
• Trade deficit (Dec. 6): We estimate the nominal trade deficit widened in October by $7.2 billion to $80.5 billion, based on our processing of the trade figures for goods released last week.
• Producer price index for final demand (Dec. 9): We estimate a 0.4% increase for November, and a 0.4% increase for core PPI, which excludes the direct effects of changes in prices for food and energy.
• University of Michigan Consumer Sentiment Index (Dec. 9): We estimate the index remained at a level of 56.8 in the preliminary December reading, unchanged from November. Inflation and concerns about a recession are major sources of drag on sentiment.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.