- US Labor Market Seen Cooling, But Not Nearly Enough for Fed
US hiring likely continued to moderate at the start of the year, though still-solid wage growth, an unemployment rate near historical lows and high vacancies are seen stiffening the Federal Reserve’s resolve to keep rates elevated for some time.
Friday’s jobs report is expected to show payrolls rose by 190,000 in January. Economists also estimate that average hourly earnings rose 0.3% for a second month and the unemployment rate slightly ticked up from a five-decade low.
While the payrolls gain would be the smallest advance in just over two years, it illustrates resilient labor demand that favors a soft landing for the economy as long as inflation keeps slowing.
Though the Fed is moving closer to a pause in its policy-tightening campaign, how long interest rates stay high depends in large part on how long it takes for the labor market to turn and wage growth to soften.
“We expect January’s jobs report to show a gradually loosening labor market. Labor supply could also improve on the margins, as the winter wave of flu, RSV, and Covid has peaked. Still, the slow pace of cooling may keep Fed officials on their toes and skeptical that the more persistent component of inflation is squarely on a downward path.”
— Anna Wong, Eliza Winger and Niraj Shah, economists
Data out this week showed how robust the job market has remained. Applications for US unemployment benefits fell last week for the fourth time in five weeks, Labor Department data showed Thursday.
And job openings unexpectedly jumped above 11 million in December. The gain was primarily driven by a surge in vacancies at accommodation and food services and retail trade, two areas where the Fed is particularly worried about wage growth. The ratio of openings to unemployed, a figure Powell has repeatedly referenced, rose to a near-record 1.9.
That said, separate data showed wage and benefit growth did slow at the end of last year.
2. U.S. job openings increase to five-month high as labor market stays tight
Signs of persistent labor tightness did not discourage the U.S. central bank from raising its policy rate by 25 basis points at the end of a two-day meeting on Wednesday, further slowing the pace of the Fed’s rate hikes. The Fed promised “ongoing increases” in borrowing costs.
“This could well be the first recession in history without material job losses,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “It’s a good thing for the Fed that inflation pressures are cooling because the labor market isn’t cooling at all.”
Job openings, a measure of labor demand, increased by 572,000 to a five-month high of 11.0 million on the last day of December. Economists polled by Reuters had forecast 10.250 million job openings.
With vacancies concentrated in the leisure and hospitality industry as well as retail trade, some economists believed December’s surge was temporary. Others speculated that job openings had been overstated because of difficulties adjusting the data for seasonal fluctuations.
“The leisure and hospitality sector accounted for three-quarters of the total increase, rising to its highest level since December of 2021 – a month which was followed by a sharp decline in January 2022 – a pattern we expect to emerge in next month’s report,” said Matthew Martin, a U.S. economist at Oxford Economics in New York.
Despite the deterioration in conditions, factories did not appear to be laying off workers in large numbers. According to the ISM, companies “are indicating that they are not going to substantially reduce head counts as they are positive about the second half of the year.”
That was reinforced by the JOLTS report, which showed layoffs climbing to 1.5 million in December from 1.4 million in November. The layoffs rate edged up to 1.0% from 0.9% in prior month. Workers also continued to voluntarily quit their jobs in December. The quits rates, which is viewed as a measure of labor market confidence, was unchanged at 2.7%.
3. January job growth is forecast to slow slightly, but the impact from big corporate layoffs is uncertain
According to Dow Jones, the consensus forecast calls for 187,000 new nonfarm jobs in January, down from 223,000 that were created in December. The employment report will be released at 8:30 a.m. ET Friday.
The unemployment rate is expected to edge higher, to 3.6% from 3.5%. Average monthly wage growth is expected to have stayed at about 0.3% in January, while declining on an annual basis, to 4.3% from 4.6%.
Tom Simons, money market economist at Jefferies, expects 260,000 jobs were added in January, but he said the number could be even higher.
The jobs report is of key importance for the Federal Reserve, which has been trying to slow the economy —and inflation — by cooling the hot labor market. So far, unemployment is still more than a percentage point below where the Fed forecast it will stand at the end of 2023.
Even so, Simons expects markets could react more to a lower-than-expected number of new jobs than a higher one.
Goldman Sachs economists forecast a payrolls increase of 300,000 for last month and said their above consensus forecast was based on the fact that companies do not yet seem to be implementing layoffs, despite the announcements.
The Goldman economists also expect a boost from the return of striking education workers.
Mark Zandi, chief economist at Moody’s Analytics, expects about 175,000 jobs were created in January, and he does not think it will be so much layoffs that slowdown job growth.
4. Was some of last year’s job-market strength “overstated”?
A few data points show as much, according to a Thursday presentation from Barclays. The economists found a possible overstatement of about 440,000 jobs. Compared against the official US estimate of just over 1mn jobs, that seems, uh, significant.
But Barclays says that’s less dire a picture than a couple of other reports out recently:
1) Last week’s report on Business Employment Dynamics, or BDM, estimates that a net 287,000 jobs were lost in the second quarter, seasonally adjusted.
2) The Philly Fed’s early benchmark revisions of state payroll employment, published in December, says that just 10,500 net new jobs were created that quarter, on a seasonally adjusted basis.
To come up with their estimate of the BLS’s overstatement of 440k, Barclays’ economists go the source of both the Philly Fed and BDM data, the BLS’s Quarterly Census of Employment and Wages, or QCEW.
The QCEW report is very reliable, Barclays says. “Since nearly all employers are required to participate in UI, this is close to a complete Census count, covering about 97 per cent of overall employees,” the economists write in their presentation.
Tomorrow’s report (on January jobs creation) will therefore be benchmarked to the QCEW’s numbers from 1Q22. And because the BLS only benchmarks its annual payroll numbers to the prior March, the 2Q job-creation figures won’t be revised to more accurate levels until next year.
Source: The Financial Times
5. Despite Layoffs, It’s Still a Workers’ Labor Market
The recent layoff announcements at Google, Amazon, and Microsoft impacting a total of 40,000 employees have many worried about the job market.
In fact, the economy in early 2023 is not being roiled by layoffs — which are currently abnormally low compared to historical standards. This means the labor market remains really tight, despite arguments to the contrary. As a result, hiring will remain tough, and it may even mean central banks will have to keep interest rates higher for longer.
Layoffs are, of course, not the only measure for labor market tightness. Voluntary job quits, for instance, reached a historic high at the end of 2021. This indicator is still high compared to pre-pandemic levels, but it has cooled off compared to the year prior.
None of this is to say that labor market won’t slightly cool off at some point soon. The Fed has signaled that it will keep interest rates high until inflation cools off and higher interest rates will soften demand in other economic sectors. Eventually, lower demand in the economy will lead to a softer labor market.
Given the current backlog of vacant roles coupled with a drop in the labor force participation, American businesses are likely to continue struggle to hire for months to come.
Source: Harvard Business Review
6. Wall Street bets Powell will flinch on rate hikes once job market sours
The market’s expectation that the central bank will ease up is partly driven by the presence of new faces on the Fed’s seven-member board in Washington. In addition to reappointing Powell, President Joe Biden named three new members and promoted Lael Brainard, who in past years advocated for going slow on rate hikes, to Powell’s.
As Fed officials meet in Washington this week to raise borrowing costs for the eighth straight time, investors are laying overwhelming odds that the central bank will reverse course in the coming months and start slashing interest rates if the labor market begins to suffer and inflation continues to cool. The Fed insists it has no plans to start cutting until at least next year.
Other new Fed officials outside Washington are economists who have long pushed for broad and inclusive employment. Among them: Austan Goolsbee, a onetime chief economist to former President Barack Obama who recently became head of the Chicago Fed and joined his first central bank policy meeting this week.
“There’s a pretty strong view that they will ease sooner than they say they will,” said former Kansas City Fed President Thomas Hoenig, whose tenure included the 2008 financial crisis when the economy was losing more than 700,000 jobs a month. “The pressure would be to say, ‘Well, we’re just about there, we can ease back.’”
At a press conference Wednesday, Powell said he expects the job market to weaken, growth to slow, and inflation to continue coming down but only gradually. “If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year,” he said.
7. Some CEOs are pushing workers to return to the office, but it could come with a cost: hurting diversity
JPMorgan CEO Jamie Dimon and some other corporate leaders are in favor of workers returning to the office. But remote work can benefit people from underrepresented backgrounds.
The JPMorgan CEO drove a $30 billion plan to advance racial equity in the US. He’s spoken about the importance of reducing inequality, advancing people from underrepresented backgrounds in leadership, and other social-justice issues.
But Dimon appears more bearish when it comes to another measure that’s been shown to promote diversity: remote work.
Dimon has also said that remote work can “help women,” given the caregiving duties that disproportionately fall upon them. “Modify your company to help women stay home a little,” he said. And he said it’s reasonable for employees who work in jobs like research and coding to work remotely.
But the push from some CEOs to return to the office could come at a cost to workforce diversity — something these and other chiefs have vowed to increase. Working from home doesn’t only help women who are caregivers, it can be life-changing for some people from underrepresented backgrounds. Remote work has opened career opportunities for many with invisible disabilities like depression or ADHD and those with physical disabilities. It’s also improved working conditions for some Black workers and some male caregivers.
An October report by the Economic Innovation Group, a think tank, found that individuals with disabilities between the ages 25 to 54 were more likely to be employed in 2022 than before the pandemic. Disability advocates say this is because of the rise in remote-work options, which are a godsend to people who need more control over their working environment.
“Remote work offers disabled employees the chance to work, but in their own homes, which provides greater flexibility, accessibility, savings in commuting time and expenses, and even privacy that may be needed to address medical issues that cannot be addressed in the workplace,” Arlene Kanter, a professor at Syracuse University College of Law, wrote in a Harvard Law School blog post last year.
Remote work can help people who are neurodiverse and those with autism or mental-health disorders be more productive, advocates say. Some benefits of working from home, like reduced stress and more sleep, extend to people without disabilities, too, according to an analysis published on the Association for Psychological Science’s website.