Another jobs disconnect
Fed poised to hike rates in March
For the second consecutive month, December’s headline nonfarm payrolls were much weaker than expected, posting their smallest gain of the year at only 199,000 jobs. This is well below the Bloomberg consensus of 450,000 and our more optimistic forecast here at Federated Hermes for a larger gain of 725,000. Once again, this labor-market weakness is completely inconsistent with strength throughout the rest of today’s report, which suggests that we’ll continue see sizable upward revisions in coming months.
More seasonal adjustment issues The Labor Department reported this morning that on a non-seasonally adjusted (NSA) basis, December’s payrolls grew by only 72,000 jobs. Normally over the past 20 years, its Bureau of Labor Statistics (BLS) seasonally adjusts this number upward by an average of 334,000 jobs in the month of December. This would have resulted in a seasonally adjusted gain this morning of 406,000. But the BLS chose to increase today’s non-seasonally adjusted print by only 127,000 jobs to arrive at today’s disappointing gain of only 199,000.
Moreover, October and November were collectively revised higher by a combined 141,000 jobs. If we adjust this morning’s NSA report for a normal seasonal adjustment of 334,000 jobs and add back the positive revisions of 141,000 jobs, that equates to a normalized trendline gain of 547,000 jobs in December, which is nearly 100,000 jobs above consensus. So why did the Labor Department twice intentionally override its normal seasonal adjustments to produce much weaker-than-expected payroll gains?
Wage inflation accelerates Average hourly earnings rose by a hotter-than-expected 0.6% in December month-over-month (which annualizes at an outsized 7.2%) and by 4.7% year-over-year (y/y). Over the past four months, wages have now surged at an annualized pace of 6.6%. Hourly workers at Kellogg and Deere, for example, recently settled strikes when management included a COLA (cost of living adjustment) clause in their new contracts. Companies often pass their higher labor, shipping and commodity costs onto their customers in the form of higher prices, resulting in a self-reinforcing inflationary cycle.
Unemployment and labor impairment rates plunge to cycle lows The household survey rose for the sixth consecutive month in December by 651,000 jobs, (down from nearly 1.1 million jobs in November), and the number of unemployed people also fell for the sixth consecutive month by 483,000 (down from 573,000 in November). As a result, the unemployment rate (U-3) plummeted to a new cycle low of 3.9% in December from 4.2% in November and from 5.9% in June. We expected that U-3 could approach its pre-pandemic cycle low of 3.5% by year-end, but that could be too conservative. The labor impairment rate (U-6) also plunged to a new cycle low of 7.3% in December from 7.7% in November and from 10.2% in May. The civilian labor force added 168,000 workers in December (down from a gain of 516,000 workers in November). As a result, the participation rate remained flat at 61.9% in December.
ADP, claims & JOLTS remain solid The ADP private payroll survey rose by the most in seven months in December with a much stronger-than-expected gain of 807,000 jobs, more than double consensus expectations of 410,000. Initial weekly jobless claims fell to a post-pandemic cycle low of only 188,000 claims last month, down 97% from their April 2020 peak. The lagging Job Openings & Labor Turnover Survey (JOLTS) slipped to 10.6 million open jobs in November (just off October’s record high of 11.1 million openings). Voluntary quits rose to a record 4.5 million in November, with a record quits rate of 3%, as the “Great Resignation” accelerates.
Fed remains on track We believe the Federal Reserve will discount this morning’s huge headline payroll miss and focus on the labor market’s underlying strength. We expect policymakers to complete their tapering process by March, at which point they will begin to implement four quarter-point rate hikes over the course of 2022.
K-shaped recovery continues The K-shaped labor-market recovery took another step in the right direction last month, as the unemployment rate for low-wage individuals fell to 5.2% in December from 5.5% in November, down sharply from 7.3% in October. High-wage workers, by comparison, saw their rate of unemployment tick down to 2.1% last month.
The recent surge in the highly transmissible but less virulent omicron Covid variant since Thanksgiving is certainly a concern, but we believe it may peak and begin to recede before month’s end. The savings rate has fallen back to 6.9% in November from nearly 27% last March, the $300 weekly Federal unemployment bonus ended in September, and schools and child-care facilities have largely remained open.
Sector details soft The manufacturing sector added a much weaker-than-expected 26,000 jobs in December (consensus at 35,000), down from 35,000 jobs in November and 52,000 in October. Due to relatively good weather, construction hiring rose for the fourth consecutive month, adding 22,000 jobs in December, 35,000 jobs in November and 44,000 in October. Despite a strong start to the Christmas shopping season (with sales up 17% y/y) in October and November, retailers cut 2,000 jobs in December and 13,000 jobs in November, after adding 51,000 workers in October. But transportation & warehousing did add 19,000 jobs in December, 42,000 in November and 57,000 in October. Temporary hiring, a leading indicator of employment trends, trimmed 2,000 jobs in December, after adding only 1,000 workers in November but a strong 50,000 workers in October. Leisure & hospitality added 53,000 workers and an upwardly revised 41,000 workers in November (flashed as a gain of only 23,000 workers), down sharply from a powerful increase of 211,000 new workers in October and 108,000 in September.