Name: There Are Hidden Recession and Inflation Warnings in December’s Jobs Report
Uploaded: 2024-01-05T15:40:00Z
Duration: 17 min 41 s
Description: The last report on jobs, wages and inflation for December 2023 is packed with contrary signals. Jobs rose by one measure, but fell by the most since April 2020 by another. And wages are rising. Is that good or bad? WSJ’s Dion Rabouin breaks down the data. Photo: Andrew Caballero-Reynolds/AFP/Getty Images

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The last report on jobs, wages and inflation for December 2023 is packed with contrary signals. Jobs rose by one measure, but fell by the most since April 2020 by another. And wages are rising. Is that good or bad? WSJ’s Dion Rabouin breaks down the data. Photo: Andrew Caballero-Reynolds/AFP/Getty Images

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There Are Hidden Recession and Inflation Warnings in December’s Jobs Report

Hey, out there. Welcome, welcome, welcome into another edition of Market Takes. I know you could have been anywhere in the world, but you're here with me, I appreciate that. I'm Dion Rabouin, a reporter at the "Wall Street Journal." We are breaking down the Non-Farm Payrolls Report, the Jobs Report for those of you not in the know, and today's Jobs Report, man, I think a lot more questions than answers. We are gonna dig into that, but there's a lot here that you could take out in terms of what's going on with a potential 2024 recession. There's a lot that you could take from this report in terms of what's going on with inflation, what's going on with the labor market, we're gonna dig into all of that. So we're gonna talk about what this Jobs Report showed and how that compared to expectations. We're also gonna talk about some of the standout numbers in the report because this is the kind of report where the devil is in the details, it's all about the fine print. We're gonna talk about why concern had been growing about the labor market kind of coming into this, of course, we're gonna talk about the market reaction, we're gonna get to stocks, bonds, currencies, commodities, talk a little bit about crypto and all of that. Talk about the current market focus and look ahead to this month's Federal Reserve, the FOMC Meeting, and, of course, we're gonna talk about what comes next because we are always looking forward, even though it is backward-looking data. So without further ado, let's throw a chart up here on your screen so you can see what we're talking about in terms of this month's Jobs Report. This month, the US economy added 216,000 jobs. The unemployment rate stayed steady at 3.7%. That was well above expectations for 170,000 jobs added, expectations for the unemployment rate to tick up to 3.8%, but that actually wasn't all good news. There's some worrisome news in there if you wanna get into it, and we are in just a bit. In November, 173,000 jobs added in November. That was revised down from 199,000, another downward adjustment. This has been the year of downward adjustments, as in every time the report comes out, well, we say, "Okay, well, we added 199,000 jobs in November." Actually, it was 173, "We added 150,000 in October," is what we told you when that report came out, actually, it was 105,000. But what this shows you when you look at this chart, what you're starting to see is a new trend. So it looked like we kind of bottomed out in October in terms of the slowing down of the jobs market. And now we're picking back up. If you look here, what you're seeing is a trend of consistently moving lower, the jobs market slowing down as we get outta that boom return in 2021, into 2022, and as we go into 2023, right? You see a few outliers, but mostly, the trend is lower, you've got lower highs and lower lows. But what we are seeing in the past three months, October, November, December, is a pickup, 105,000, 173,216, so it looks like the jobs market is starting to pick up some momentum. And this chart really just illustrates the change that we could be seeing in terms of the trend, the trend had been coming down, now it's picking back up, and we've got three months now showing that pickup. And there's a number of other things when we dig into the data. So the first thing I want to talk about is average hourly earnings. We saw a pickup of 0.4% for the second month in a row. My man, Thomas Simons, he's the US Economist at Jefferies, he calls it, "Surprisingly strong." Jefferies was expecting a turndown that November's big pickup and average hourly earnings as in wages, as in what we're making on our paychecks, he thought that was due largely to the UWS Strike, and I'm gonna get into what he said, and quote him in just a minute. But that 0.4% increase, that surprisingly strong increase last month, translates to a 4.1% increase in year-over-year average hourly earnings. Why does that matter? Because average hourly earnings had been coming back towards 3%, which the Federal Reserve says, "Is in line with about 2% inflation." 4.1% means we're moving up higher, and that could really start to change the Fed's thinking in terms of how they're looking at what's happening with inflation, as well as what they're thinking about what's going on in the job market, we'll talk about that in just a second. Lemme quote you, Thomas Simons, again, US Economist at Jefferies. He says, quote, "We had expected some more weakness here, given that last month was juiced up a little bit by the return of relatively high-paid auto manufacturing workers following the end of the UAW Strike. Instead, it looks like moderately strong wage pressure remains firmly embedded in the labor market for now. Definitely keep your eye on that." Another piece of this that could pose some worry that could push inflation up higher, you saw a decline in labor force participation. Labor force participation was down 0.3%. The employment-to-population ratio was down 0.3%, and again, that's kind of reversing, the labor force participation rate is literally just how many people are participating in the labor force. So right now we're down at about 62.5% that had been rising towards 70% back in the day, and we've slowed down really post-pandemic, and haven't brought those, folks, as they say, "Sitting on the sidelines," back into the labor force. People who have lost their jobs and haven't come back in to find a new job or haven't found a new job, they're not coming back in, and you saw a decline. And that's actually why the unemployment rate stayed at 3%, or 3.7%, instead of rising at 3.8% as had been expected. So you got actually, a worrisome sign as in usually when the unemployment rate stays the same or goes down, that's good because it means more people are getting jobs. Actually, what it means is more people just said, "I'm not looking for a job." They're on the sidelines, they don't have a job, but they're not looking for a job, they're not trying to find one. And the unemployment or the employment population ratio was down, the labor force participation rate was down, all those things moving lower, that's actually a bad sign, it also is a bad sign for inflation, because again, it restricts or diminishes the pool of available workers. So if a business can hire, you know, someone with only a high school education or someone with a college education, they're gonna have to pay that person with a college education more. If that person with a high school education only, drops out, well now, they've gotta pay the guy with the high school or the gal with the college degree, right? Pay that person more money than they would the high school person or the person with only a high school education. Less people in the labor force tends to push up wages, means employers have to compete more and that tends to push up wages, means they have to pay more, and that could concern the Feds. That's great for you and I, but the Federal Reserve wants those numbers to come down. Another big piece of this was the Household Survey. So there are two pieces to the Jobs Report. One is the Bureau of Labor Statistics calls up households, literally just calls your house, calls your cell phone, and says, "Hey, at your house, do you have a job? Does everyone in your house have a job? Did they lose a job, gain a job in the last month?" And that tells them what's going on. The other thing they do is they call up businesses, they call up companies, they say, "What were your payrolls like last month? Did you add people? Did you fire people?" So on the Establishment Survey, that's where we get the 216,000 jobs added, the best we've seen since September. On the Household Surveys and calling people on the phone saying, "Hey, what's going on?" We saw a decline of 683,000 jobs, that's huge. And Thomas Simons says, "That's much weaker than what we've seen in recent months. it's the weakest we've seen since April of 2020," that's huge. We're gonna talk about that just a little bit more, but you also, in addition to 683,000 decrease, or 683,000 increase in unemployment, you saw a 6K, or sorry, unemployment increased by 6,000, unemployment decreased, or employment decreased by 683,000. I'm sorry if I confused you. Employment down 683,000, unemployment up 6,000. So 670,000, 676,000 people left the labor force in December. That is significant and you're gonna wanna watch that. So let's talk about the Fed a little bit, right? When I talked to Austan Goolsbee on WSJ's Take On the Week, check out my podcast anywhere you get your podcasts, I spoke with him back in December and he was saying that we're in a restrictive environment now. And he says, quote, "In that restrictive environment, you want to also be aware that historically when the unemployment rate starts going up, it doesn't just gradually drift up, it tends to go up rapidly." And the Fed had really been shifting its concern from inflation to unemployment. And when the Fed shifts its concern from inflation to unemployment, that means they wanna bring rates down because high rates restricts employment, keeps folks on the sidelines from getting jobs, and then they have to worry about keeping the rate high. Well, when they switch that focus and wanna focus on jobs, that means they need to lower the rate. So that's the Fed kind of giving that signal of, "Hey, we think rates are gonna come down." If wages are going up, if less folks are coming into the job market, and the labor market, and the labor force as we saw this month, well, that again puts the focus on inflation, that means the Fed needs to keep rates high. So this could be a big piece of that, and a big piece of what comes next for the markets and for the economy. I wanna talk really quickly about the JOLTS Report, because that's a big piece of this too, and what the Fed had been looking at in terms of what's going on with the labor force. So let's throw up here really quick, I wanna talk about the Quits Rate. I wanna throw a chart up here of the Quits Rate on your screen. So what you're seeing there is very clear. The Quits Rate is literally just what percentage of people are quitting their job. And quits are a sign of confidence in the economy. Basically, when more people are quitting their job, it shows that the economy's got swagger. You know how it is when you got another job out there, when you feel good about your performance, about your ability to get another job, you start thinking, "Man, I wish my boss would say something, I wish they would talk about not giving me a raise. I wish they would refuse my demands, I quit!" And a lot of people did. So in 2021, 2022, you see that Quits Rate rising up to 3%, and then you see it coming down significantly. And what happened was employers started saying, "Ah, well we gotta, you know, lock down our headcount, we gotta do a hiring freeze, we gotta start doing some layoffs." And folks got less confident. All that swagger, you know, you were walking around the office with, that went away pretty quickly in 2023, and you see that Quits Rate diving. And what we saw was in November, and this is the Quits Rate from November, we saw the lowest Quits Rate since September, 2020. That is significant. So remember, the JOLTS Report is a month behind, but this chart really here just illustrates the way that confidence has really come out of the labor market in a significant way. and that's something the Fed was worried about, and that was the trend we saw approaching year-end, I wanna put another chart up here on your screen, which is the Wage Growth Tracker. This is the Atlanta Fed's Wage Growth Tracker. And you see a bit of the same thing, right? You see wage growth, and this isn't wages themselves, this is the growth of wages really just picking up, and that led to that confidence that we saw, right? Where people were feeling good about, they could leave a job and make more money, well, that's come down in a big way, but what you see there at the end is it's stagnating, it's kind of plateauing, it's not falling off a cliff. And that kind of tells us, "Okay, maybe inflation's gonna hold here. Maybe that wage growth that those wage gains that we were seeing at the beginning of 2023 and 2022 into the beginning of 2023 could be coming back." So this chart just illustrating, again, we had seen a consistent theme of employers really having the upper hand, employees, workers had the upper hand in 2021, 2022. We heard all about quiet quitting the nonsense term that was all around. We heard all about folks getting new jobs, leaving, getting big raises at their jobs, getting big increases in their salary to switch jobs, and that had sort of been ending, but it looks like towards the end of the year, that theme went away, and employees, workers started getting a bit more of the upper hand. And that's gonna give the Fed a bit more pause because as wages stay high, that puts pressure on inflation because the more people expect that inflation's gonna be high, the more people can demand higher wages, the more they're also willing to go out and spend, and when folks are spending, companies keep raising their prices, we've seen it over and over and over again. I did a video about this two years ago. We talked about why companies love high inflation. They love it because they can then raise their prices and keep raising those prices. That puts a floor on inflation, pushes inflation up. Let's look about and look at how the market is responding to this. So let's get the market up here on your screen and see what we're looking at. We are seeing stocks moving higher. We saw a little bit of trepidation immediately after the report came out. The market actually opened lower, but right now, investors on the stock side are really taking a bullish view. You've got the Dow, the S&P, the Nasdaq, all up pretty significantly today, and really moving higher after investors had a chance to kind of digest those reports. Let's talk about the bond market really fast. We are seeing a significant downturn right now in the 30-year, really across the board. These had been up immediately following the report, you saw bond yields rising, but you are seeing a significant pullback in reversal right now, and you're seeing now bond yields negative across the board. This is really having a significant impact, especially on those longer-term rates, you're seeing right now, again, just this big reversal, right? The report came out, the Jobs Report came out, "Oh, okay, 216,000 jobs," bond yields went up, and now you're seeing that trend reverse. That's having an effect across the board, and that's really what's moving things, I think that's why those stock numbers are up. You're seeing it in the currencies, you see it with the Euro spiking higher, that means the dollar is moving lower. Look at the U.S. Dollar Index, really, again, we see a move after the report came out, and then we see a reversal, really across the board in markets. And again, that trend just illustrating that we are seeing a rethink about what's going on in the labor market and maybe a rethink about what's going on in the markets overall. So big picture, what's going on? Like I said, read the fine print. The fine print in this Jobs Report is average hourly earnings are up more than expected, much more than expected. Labor force contracting, meaning less folks for employers to hire. When that labor pool gets smaller, wages usually rise. Good thing for workers, not such a great thing for inflation. That JOLTS Report, again, showing the lowest Quits Rate since September, 2020. Again, that's all about confidence. Wages had been slowing. We had seen weekly earnings flat, but again, with this pickup that we're seeing, the pickup in jobs, the pickup in hiring, the pickup in wages, these could all mean that the Fed needs to think more about inflation again, and that's certainly something to keep your eye on. This is one of those reports you can kind of take what you want from it, you could take the bullish positive review or positive outlook on it and say, "Okay, well, you know, 216,000 jobs added, wages rising, that's a good thing for the economy." But you could also take the other side of that. And again, this is all about the Fed. The last FOMC minutes that we got, showed the Fed is, there's been more talk about keeping rates high. The Fed is not all the way bought into this narrative from the market, that they will be cutting rates this year. The market had been pricing in six rate cuts coming into this Jobs Report, but you had seen the confidence kind of coming out when you look at the Fed funds futures market, and we have seen that again today. Now the market is really only pricing in five rate cuts for 2024. And that rate cut for March, which should have been priced in at 75, 80%, well, that's down to a 56% chance. It was down to about a 65% likelihood on Thursday. So this report has really solidified, the Fed has a lot more to think about, that it's not as cut and dry as a lot of folks had thought. I wanna quote the University of Central Florida Economist Sean Snaith, he sent out an email, he said quote, "Talk of the Fed cutting rates in a few months was a bit of fanciful thinking." Snaith says that, "The labor market remains stubbornly strong, and wage growth is not at a level consistent with the 2% inflation target." That's Sean Snaith from the University of Central Florida. Again, the market seems to be kind of coming back into that way of thinking, and that could be why we've seen a bit of the selling we saw today, or this week, right now, the market's up as you saw, we'll see if that continues, we'll see what investors make of the data that we've gotten, and it could be some other events, some exogenous events that are moving the market. What's next? Well, we've got the Employment Trends Index, that is out Monday, you're gonna wanna watch that because the Fed watched that, because the Fed watches that, excuse me, and, of course, it's still all about the Fed. The NFIB, Small Business Optimism Index is out on Tuesday, that has been under the 50-year trend for the last 23 months in a row, we'll see if we can make it an even two years, when that report comes out on Tuesday. Thursday, the Consumer Price Index Inflation Data, we will be right here on Market Takes breaking that down, so be with us, come join us on Thursday, and, of course, for more, check out my podcast, WSJ's Take On the Week, look it up right now, get it anywhere you get your podcasts. Apple, Stitcher, Spotify, whatever you do, WSJ's Take On the Week is on there, I hope you'll join me. We cut through the noise to explain the major business and financial moves that move markets so you can make smarter investing decisions, subscribe wherever you get your podcasts. That's gonna do it for me. I'm Dion Rabouin, reporter at the "Wall Street Journal." This has been Market Takes. I hope you'll come back and join us on Thursday when we're doing it again.