• Jobs growth above expectaions
• JNJ announces IPO

JOLTS

According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for November, the number of available jobs fell to 10.46 million from 10.51 million a month earlier. While the openings total fell slightly, previous months were revised higher providing an offset and underlining the fact that positions are still plentiful across the country. The ratios of openings to unemployed people remained elevated at 1.7x, little changed from October. It was about 1.2x before the pandemic struck these shores. The so-called “quits rate,” which measures voluntary job leavers as a share of total employment, rose for the first time since February to 2.7%. At year-end 2019, that rate was closer to 2.3%. Job switchers see more than double the average wage growth of those who stay in their position according to the latest ADP employment report.

Weekly initial unemployment claims for the week ended December 31 came in at 204,000, down from the previous week tally of 225,000. The four-week moving average is 214,000 which remains historically low. Continuing claims fell by 24,000 to 1.694 million in the week ending December 24 which is only slightly below the pre-pandemic average of 1.697 million. Our take is that employers remain committed to keeping workers on the payroll even in the face of slowing economic activity. Layoff announcements have been contained to a limited number of sectors (Amazon announced a workforce reduction of 18,000 after admitting it over hired during the pandemic) so far but could broaden as the year progresses. According to Bloomberg Economics, the labor market is cooling but only very gradually. That pace is too slow to stop inflation from spreading to various sectors.

 

Payroll Data

U.S. nonfarm payrolls for the month of December totaled 223,000 according to the Labor Department. November’s job gain was revised down slightly to 256,000 from 263,000 originally reported. Regardless, these numbers show how resilient hiring was throughout 2022 as companies added 6.7 million jobs in total last year. Employment declined modestly in the tech-heavy information sector and among warehouse and storage workers while growing healthily in leisure and hospitality areas as well as health care. The unemployment rate was 3.5%, a decline from November’s 3.7% and below the consensus figure of 3.7%. November’s percentage was revised up from 3.6%. The 3.5% matches a five decade low.

While those numbers pointed to strength, there were signs of a slowing in momentum. Average hourly earnings rose 0.3% last month from the previous month, down from a 0.4% rise in November. That translates into a 4.6% annual rise which was down from last month’s 5.1% and below the 5.0% consensus figure in a survey of Bloomberg economists. The labor participation rate, or the share of adults working or looking for work, rose slightly to 62.3% in December from 62.2% in November. If there are more available bodies seeking to get hired, it will help keep a lid on prices needed to coax individuals to work or switch jobs. That may also be why the unemployment rate fell—because the denominator of that equation was rising as more people went out looking for jobs. [The unemployment rate measures the share of workers in the labor force who do not currently have a job but are actively looking for work. The labor force participation rate shows the number of people in the labor force—defined as the sum of employed and unemployed persons—as a share of the total working-age population, which is the number of civilian, non-institutionalized people, age 16 and over.]

How will the Fed interpret this data? On the one hand, the labor force remains hardy even after its sharp rate hike program and beginning of balance sheet reduction. On the other hand, the Fed does not want to see less people with jobs, but they do want to see lower wage growth. Higher wages fuel inflation, there’s no debating that fact. The more persistent wage growth becomes, the more persistent inflation will be imbedded in the minds of workers. It will be pleased that the participation rate is increasing but also understands that some events (like the price of gasoline and other commodities) will remain out of their control even as they affect Americans’ buying power. Thus, in our view, the Fed is probably pleased with the mixed report which is the last monthly payroll reading they will get before they next convene.

ISM Data

The Institute of Supply Management (ISM) releases data on monthly surveys which track the health of the economy. In the report released Wednesday, manufacturing activity fell for a second month in December as that gauge was 48.4 last month, the lowest level since May 2020 and down from 49 in November. Readings below 50 indicate contraction. That figure was in line with consensus. The manufacturing index fell 10.4 points in 2022, the biggest annual decline since the Great Recession. This highlights how there has been a shift in consumer spending towards services and away from goods. Interestingly, a subindex which tracks employment in that area rose to 51.4 last month, up from 48.4 in the previous month. This suggests that while manufacturing has been slumping, employers continue to hire.

Today, the ISM released its gauge on services which came in at 49.6 which is below the 50.0 contraction indicator level and significantly below the 55.0 consensus and 56.5 November reading. Because this reading, like the manufacturing one, is a sentiment reading, it is not revised from month to month like many other data points. It is a point-in-time measure of what is going on right now in these industries. What is mildly unexpected is the drop from the previous month especially as more Americans are embracing in-person services compared to the pandemic years. It was the first decline in the services index since May 2020 as the services order subindex also declined to 45.2 from 56. The services employment subindex did not experience as sharp a drop—from 51.5 to 49.8—but it too came in below the 50.0 level indicating contraction. Four out of five workers in the country in the private sector are employed in the service economy, doing everything from delivering health care to providing financial advice to food service to changing tires. A slowdown in this area is bound to have repercussions for GDP growth going forward and will bear close monitoring in the reports to come.

Fed Thoughts

There are still nearly four weeks before the Fed’s next meeting on February 1, so market watchers are noting the calendar of upcoming events. The market is going to be very focused on next week’s consumer price index data. While November’s data showed signs that inflation was slowing, traders will be curious if that trend is continuing and to what degree. Expectations are for headline year-over-year CPI data to be up 6.7% for December, a decline from November’s 7.1%. Excluding food and energy, the core annual inflation reading is anticipated to be 5.7%. Even though the numbers may tell one story, the question still is if they will be convincing enough for the Fed governors. Yesterday, Atlanta Fed President Raphael Bostic said at a conference in New Orleans: “I appreciate recent reports that include signs of moderating price pressures, but there is still much work to do. I’m sure my central bank colleagues from around the world agree with me on this.” During an interview on CNBC television, Kansas City Fed President Esther George said on Thursday: “I have raised my forecast (for federal funds) over 5%. I see staying there for some time, again, until we get signals that inflation is really convincingly starting to fall back toward our 2% goal.” Meanwhile St. Louis Fed President James Bullard noted on Thursday: “The policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer” in a slide deck during a presentation to business leaders in Missouri. Bullard was one of the most hawkish Fed members last year arguing more aggressive moves to curb inflation, so his change of heart is notable. It will definitely be an interesting meeting on February 1! So, as always, stay tuned.

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