Goldilocks jobs report

Bottom Line 

The last jobs report of the year was straight out of central casting. Both nonfarm and private payrolls in December were stronger than expected, and household employment leapt by a powerful 717,000 jobs to a record high. At the same time, the unemployment rate fell to a half-century low of 3.5% and the participation rate rose a tick. Yet, average hourly earnings ground to a 16-month low of 4.6%. 

But December’s surprising collapse in the ISM services index to 49.6—compared with 68.4 in November 2021 and 56.5 in November 2022—really caught the market’s attention. Consensus expectations were for a reading of 55.0, and the difference immediately raised recession concerns among investors. It seems to have convinced many that the Federal Reserve will soon pivot from hiking to cutting interest rates. The S&P 500 soared 2.5% today, while benchmark 10-year Treasury yields plunged from 3.75% to 3.55%.

Fed stays the course Today’s employment report is the last before the Fed’s next policy-setting meeting on February 1. We expect the Fed to orchestrate another half-point hike next month, followed by a quarter-point hike on March 22 and think a terminal rate of 5.25% will be reached by the end of the first quarter. Policymakers will likely withhold further rate action, perhaps through all of 2023, despite their own forecast that the unemployment rate will rise to 4.6% over the course of this year. This likely will push the U.S. economy into recession.

Headline employment surges December nonfarm payrolls were stronger than expected, rising by 223,000, higher than Bloomberg’s estimated consensus gain of 203,000, but below our own more aggressive estimate of 245,000 here at Federated Hermes. November was revised down by 7,000 jobs to a gain of 256,000, while October was revised down by 21,000 jobs to a final gain of 263,000.

ADP, JOLTS, jobless claims & Challenger job cuts report all better-than-expected: 

• ADP private payroll survey Employers added 235,000 jobs in December, well above consensus expectations for a gain of only 150,000. November’s figure was upwardly revised to an increase of 182,000. But wage growth soared by 7.3% year-over-year (y/y) last month for job stayers and sky-rocketed by 15.2% for those who changed jobs. 
• Lagging Job Openings & Labor Turnover Survey JOLTS declined just 0.5% month-over-month (m/m) in November to 10.458 million job openings, down 12% from a record 11.86 million job openings in March 2022. In November, there were 1.7 job openings for every unemployed worker, continuing one of the most astounding numbers of this extended labor shortage. Voluntary quitters rose to 4.173 million, and the quits rate rose a tick to 2.7%. 
• Initial weekly jobless claims After rising 57% over the four months from mid-March (166,000) to mid-July (261,000), initial jobless claims have fallen 22% to a 3-month low of 204,000 last week. But the Christmas and New Year’s holidays may have skewed weekly claims. In contrast, continuing claims have risen 30% over the past seven months to about 1.7 million in mid-December. 
• Challenger job cuts Businesses laid off about 44,000 employees in December, down from November’s 2-year high of 77,000 cuts, but still up by 129% y/y (with technology layoffs accounting for most of the terminations). 

Wages and hours worked decline Average hourly earnings rose by a weaker-than-expected 4.6% y/y in December (consensus was 5%), from a downwardly revised 4.8% gain in November (originally flashed as 5.1%). That’s down from 5.2% in August. Wages rose a muted 0.3% m/m in December, down a tick from November’s 0.4% gain. In addition, average hours worked slipped for the second consecutive month to a new cycle low of 34.3. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. 

Unemployment and labor impairment rates fall; participation rate rises Household employment surged by 717,000 jobs to a record high in December, compared with job losses of 66,000 and 257,000, respectively, in November and October. The number of unemployed people fell by 278,000 in December even better than November’s decline of 53,000, marking declines for the fifth time in the last seven months. The unemployment rate declined to 3.5% in December, which matches its pre-pandemic, half-century low in February 2020. The labor impairment rate declined to a new cycle low (dating back to 1994) of 6.5% in December from 6.7% in November. But the civilian labor force rose by 439,000 workers in December, up from a decline of 119,000 in November. That drove the participation rate slightly up to 62.3% in December, compared to the pre-pandemic cycle high of 63.4% in February 2020.

K-shaped recovery widens High-wage-earning workers saw their unemployment rate decline to 1.9% in December, just off September’s cycle low of 1.8%. But that of low-wage workers jumped to 5% in December from 4.4% in November (versus a 30-year low of 4.3% in February 2022). The personal savings rate sat at 2.4% in November, just above its 17-year low of 2.2% in October (down sharply from 26.3% in March 2021). This suggests they are returning to the labor market because their savings are dwindling. 

Sector details mixed The manufacturing sector added only 8,000 jobs for the second consecutive month, down from an average of 31,000 new workers in each of the four prior months through October. The ISM manufacturing index fell into contraction territory under 50 to 48.4 in December, and all six of the Fed’s regional manufacturing indices have plumbed to two-year lows in recent months. Construction added 28,000 jobs in December, up from 15,000 in November and 13,000 in October. Mortgage rates have more than doubled from 3% to 7% over the past year, slowing the housing market significantly. 

Temporary hiring This important leading indicator of employment trends has decelerated over the past five months, dropping 35,000 jobs in December, 30,000 in November, 22,000 in October, 23,000 in September, and 1,000 in August. Retailers added 9,000 workers in December, partially reversing a difficult Christmas, in which dismal retail hiring shed 17,000 jobs in November, 2,000 in October, and 30,000 in September. In sharp contrast, Back-to-School retail hiring added 29,000 jobs in August, 16,000 in July and 22,000 in June.

Leisure & hospitality This category has firmed over the past four months, adding 67,000 jobs in December, 79,000 in November, 50,000 in October, and 111,000 in September, compared with August’s muted gain of only 13,000 jobs. However, this four-month average of about 77,000 jobs still pales by comparison to the more robust monthly hiring pace of about 189,000 a year ago last November and December.

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