The US economy created fewer jobs than expected in December. According to data on non-farm wages, only 199,000 people have found work, while there have been 141,000 net upward revisions in the past two months. Combining these numbers gives us an employment gain of 340,000, which is well below the consensus forecast of 450,000.
In reality, this is an even more serious failure given that so many forecasts were submitted ahead of this week’s data feed which showed excellent readings for ADP payroll figures, indices of ISM jobs, Homebase data and a Job Openings and Workforce Turnover Survey (JOLTS) that pointed to even larger upward revisions to historic payroll numbers.
The Omicron wave shouldn’t have had much of an impact given the timing of the survey (week of December 12), so most of the weakness is going to be attributed to supply constraints (the market participation rate of the labor demand remains woefully low at just 61.9%) given that all labor demand surveys are so strong. The unemployment rate below 3.9% and wages rising 0.6% month-on-month are likely more important to the Federal Reserve in this case.
Wage pressures intensify
So where does that leave us? Well, despite an economy that at the end of Q3 2021 was 1.4% larger than it was before the pandemic, there are still 3.6 million people less on the payroll of companies. Considering this week’s JOLTS data showed there were 10.5 million vacant positions, it reinforces the message that this is a labor supply issue rather than a ‘a demand problem.
This difficulty in finding suitable workers is pushing pay rates up, as we see in today’s report, with the National Federation of Independent Businesses (NFIB) yesterday reporting a net record 48% of small businesses raising the rate. workers’ compensation and a net record 32% expecting wages to rise further in the coming months.
Despite the offer of higher wages, there is little evidence of a return of former workers to the labor market with a participation rate of 61.9% and an employment rate of 59.5% of the workforce. working-age population. As a result, companies have to recruit from competitors, which is why the quit rate hit a new high with 3.4% of all private sector workers changing jobs in November. This creates broader wage pressure as companies seek to retain the staff they currently have by paying them more.
Given that the United States is largely a service sector economy and labor costs are usually the biggest cost, this adds to inflationary pressures, especially in an environment where businesses appear to have fixing power. prices and can pass those costs on to customers.
The Fed seeks to regain control
The recent minutes of the Federal Reserve’s FOMC meeting in December showed that officials are serious about getting the ball rolling on monetary policy normalization. They have effectively admitted that they got the inflation announcement wrong and now recognize that the job market is in a much tighter position than they previously thought – an unemployment rate of 3 , 9% prove it. Therefore, after suggesting just 9 months ago that it would be 2024 at the earliest before the first interest rate hike, the Fed is now announcing that it will likely hike rates three times this year and three times the year. next year.
The upward pressure on interest rate expectations is not going to ease anytime soon. Next week we expect headline inflation to break above 7% yoy with core inflation exceeding 5% yoy while later in the month all eyes should be on. glued to the cost of employment index in the fourth quarter. With the NFIB and the Fed’s Beige Book pointing to intensifying pressure on wages, another 1% quarter-on-quarter increase in this index could really tip the balance in favor of a rate hike in March and open the door to the possibility of four rate hikes this year. . For now, we’re more cautious and believe that May will be the starting point for a key rate hike based on the Omicron wave clouding the near-term economic outlook, but it’s about rapidly changing situation and the Fed signaled it wanted to get back in control.