- Jan. 10, 2023
-- While inflation, rate hikes and geopolitical uncertainties have posed headwinds for the market lately, employment conditions have been a bright spot. This was underscored last week by the most recent payroll figures, which showed that employment conditions remain broadly healthy.
However, we are in a phase of the cycle where good news may be interpreted as bad news, and vice versa. For example, stocks were under pressure earlier in the week as data revealed ongoing robust job openings and declining initial jobless claims. Stocks then rallied following the report that showed wage growth is fading.
This phase reflects how all data continues to be observed through the lens of what it means for upcoming Fed policy. Here are three key takeaways from the latest jobs report:1. The labor market remains resilient.
2. Underlying job trends indicate a mixed picture with lingering pandemic distortions.
- The economy added 223,000 jobs in December, besting consensus expectations and continuing the string of strong payroll gains. While this was the lowest monthly reading of 2022, job growth has only exhibited modest deceleration since August, indicating persistent demand for labor and confirming that the economy, while undoubtedly slowing, is not coming to an abrupt halt.
- Over the last 50 years, in the six months leading up to a recession, monthly job growth averaged 99,000. In the last six months of 2022, job growth has averaged 307,000. To us, this does not suggest that we'll completely skirt a recession this year, but it does tell us that we're entering a slowdown from a much healthier employment position, which we think will produce a milder downturn.
3. Moderating wage growth reflects a softening in the labor outlook.
- Several trends are signaling that the labor market is likely to soften as we advance. Hiring of temporary positions saw a sizable decline, which is often a leading indicator of slower hiring overall. Average weekly hours worked also ticked lower, suggesting labor demand and shortages may be abating slightly.
- Encouragingly, the labor-force participation rate (the number of people in the labor force as a percentage of the population) did tick higher to 62.3%. The participation rate remains a full 1% below the pre-pandemic rate, but signs that more people are returning to the workforce would be a longer-term positive for the growth of the economy.
- Data earlier in the week indicating further tightness in hiring conditions prompted a move lower for equity markets. However, stocks rallied strongly following Friday's employment report, which we'd attribute to the softer wage data. Ten-year Treasury rates moved sharply lower on this news, confirming that the markets found comfort in the fact that moderating wage growth is an additional source of support for a moderating inflation outlook.