Jobs Data Tries to Fool the Markets

John Smith
January 1, 2023
5 min read

Job growth beat expectations in December, but is the labor sector as strong as the headlines imply? Plus, the minutes from the Fed’s last meeting suggest rate cuts are ahead, though the timing remains unclear. Here are the highlights:

  • Job Growth Less Rosy Than It Appears
  • Private Sector Job Growth Beats Expectations
  • Job Openings Hit 2-year Low
  • Unemployment Filings Likely Impacted by Holidays
  • Fed Minutes Suggest Rate Cuts Likely
Job Growth Less Rosy Than It Appears

The Bureau of Labor Statistics (BLS) reported that there were 216,000 jobs created in December, which is stronger than the 170,000 that were forecasted. However, revisions to October and November removed 71,000 jobs in those months combined. The unemployment rate held steady at 3.7%.

What’s the bottom line? While the headline job growth figure for December appears strong on the surface, future revisions lower are a very real possibility. Job creations were slashed for almost every month last year in subsequent reports, to the tune of nearly 500,000 less jobs than originally reported.

In addition, there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from, and it's based predominately on modeling and estimations.

The Household Survey, where the Unemployment Rate comes from, is considered more real-time because it’s derived by calling households to see if they are employed. This survey has its own job creation component and it told a completely different story, showing 683,000 job losses.

And of note, average weekly hours worked also declined slightly, which is important because one of the ways businesses cut costs is to cut the number of hours worked. On average the entire labor force is working 30 minutes fewer per week, which equates to 2 million job losses on its own.

Private Sector Job Growth Beats Expectations

ADP’s Employment Report showed that private payrolls were stronger than forecasted in December, as employers added 164,000 jobs “led by a healthy bump in leisure and hospitality hiring.” Almost all the growth came in service-providing industries, with goods-producing companies only adding 9,000 jobs. Annual pay for job stayers increased by 5.4% while job changers saw an average increase of 8%, though these figures have cooled considerably from recent highs.

What’s the bottom line? Nela Richardson, chief economist for ADP, noted that “we're returning to a labor market that's very much aligned with pre-pandemic hiring.” She also explained that “while wages didn't drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared.”

Job Openings Hit Two-year Low

The latest Job Openings and Labor Turnover Survey (JOLTS) showed that job openings fell from 8.85 million in October to a less than forecasted 8.79 million in November, which is the lowest level since March of 2021. The hiring rate dropped from 3.7% to 3.5% while the quit rate also declined from 2.3% to 2.2%, suggesting there’s a lack of employers trying to entice workers with other offers.

What’s the bottom line? While the Fed watches this report to monitor slack in the labor market, there are flaws in the data. The increase in working from home means job listings are being posted in multiple states more frequently. As a result, they’re being overcounted in the JOLTS total, meaning the report may be weaker than the headlines suggest.

Unemployment Filings Likely Impacted by Holidays

Initial Jobless Claims fell by 18,000 in the latest week, as 202,000 people filed for unemployment benefits for the first time. Continuing Claims also declined by 31,000, with 1.855 million people still receiving benefits after filing their initial claim.

What’s the bottom line? Initial Jobless Claims are historically lower during the holiday season, as layoffs tend to wane before Christmas and New Year’s. And while Continuing Claims fell in the latest week, they have been trending higher and point to a weakening labor market, where it’s much harder for people to find employment once they are let go.

Fed Minutes Suggest Rate Cuts Likely

The minutes from the Fed’s December meeting showed there is a growing sense among Fed members that inflation is under control. The Fed cited the decline we’ve seen in their favored inflation measure, Core Personal Consumption Expenditures, which strips out volatile food and energy prices. The Fed also acknowledged that there is a risk to the economy if they remain “overly restrictive.”

What’s the bottom line? After hiking their benchmark Fed Funds Rate (the overnight borrowing rate for banks) eleven times since March of 2022 to slow the economy and tame inflation, almost all participants indicated that a lower Fed Funds Rate would be appropriate by the end of this year. However, the minutes did not provide any insights regarding when rate cuts might occur. 

To cover their bases, the Fed noted that there was "an unusually elevated degree of uncertainty" and that further hikes to the Fed Funds Rate are still possible.

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