December Jobs Report Hints at Soft Landing

  • Nonfarm payroll jobs increased 223 thousand while the unemployment rate dipped from a downwardly revised 3.6% to 3.5%. Expectations were for 203 thousand new jobs, while revisions for the prior two months subtracted 28 thousand jobs. While on its face this report was perhaps stronger than expected the moderation in job gains continues as the average monthly gain in 2022 was 375 thousand vs. 562 thousand in 2021. Meanwhile, the downward revision to the prior two months puts the December job gain, on net, close to expectations.

 

  • Wages came in below expectations and that will be greeted with enthusiasm at the Fed and is prompting a relief rally in both equities and bonds. The monthly gain was 0.3% vs. 0.4% expected. In addition, the prior month was revised lower from 0.6% to 0.4%.   The year-over-year pace dipped to 4.6% vs. 5.0% expected. The November YoY rate was revised lower to 4.8% from 5.1%. The latest YoY rate of 4.6% was the lowest since August 2021. Also, average weekly hours dipped to 34.3 hours which is the lowest since April 2020 and that hints at an early indication of weakening labor demand. The hours peaked at 35.0 hours a year ago. All things considered, the wage components in this report will dim fears of a wage-price spiral, at least for a month.

 

  • As mentioned, the unemployment rate dipped from 3.6% to 3.5%, beating the 3.7% expectations.  On its face that would seem to imply further Fed tightening above expectations. However, we have noted before the recent differences in the Household Survey, that is used to generate the various employment ratios, versus the Establishment Survey that generates the headline job growth numbers. For October and November, the Household Survey saw a decrease in jobs compared to the gains noted in the Establishment Survey. That difference reversed in December with the Household Survey seeing an outsized gain of 717 thousand. Those job gains came from a decrease of 278 thousand unemployed and an increase of 439 thousand to the labor force, which will all be positives for the Fed.

 

  • The numbers noted above resulted in a two-tenth increase in the Labor Force Participation Rate to 62.3%, beating the 62.2% expectation.  The participation rate a decade prior to the pandemic averaged 63.3% while the average over the past year has been 62.2%. Thus, the damage from the pandemic continues to be a long-term issue for the labor market, but with the latest move upward it does offer a glimmer of hope that more growth in the labor force, and thus a less tight labor market, remains a possibility.

 

  • This report can be characterized as offering hope that a soft landing is still possible. Job growth is slowing but still solid, however, outsized wage gains seem to be abating, and the renewed labor force growth should work to further reduce upward pressure on wages and reduce wage-price pressures that worry the Fed.

 

  • This report increases the odds of a 25bps hike vs. 50bps at the February 1st FOMC meeting.  However, next week’s December CPI report will provide the final say in the 25bps vs. 50bps debate. Expectations are for mild numbers with the both the overall and core YoY rate seeing material declines. The overall is expected to dip from 7.1% to 6.6% and the core dipping from 6.0% to 5.7%.

Year-Over-Year Change in Average Hourly Earnings


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.09 4.88 4.83 4.82 4.91 5.37
0.50 5.08 4.86 4.77 4.71 4.77 5.26
1.00 5.07 4.82 4.73 4.67 4.68 5.13
2.00 4.81 4.68 4.59 4.56 NA
3.00 4.54 4.50 NA
4.00 4.45 NA
5.00 4.42 NA
10.00 NA

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Published: 01/06/23 Author: Thomas R. Fitzgerald