January nonfarm payroll report should show slower growth, but will it suit the Fed?
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The labor market is still "out of balance," Federal Reserve Chair Jerome Powell said on Wednesday. So the U.S. central bank policymakers will no doubt comb through the Department of Labor's Employment Situation report for January on Friday for further clues on how the economy is developing.
Economists are expecting the U.S. economy will add 185K jobs to nonfarm payrolls in January, down from the 223K added in December. The unemployment rate is expected to tick up to 3.6% from 3.5%.
"We do have an expectation that at some point, we will see these increases in unemployment that we failed to see in recent months, even with announcements of massive layoffs," Giacomo Santangelo, economist at job site Monster, told Seeking Alpha.
The Fed wants to see new jobs growth slow to reduce the gap between labor supply and demand so that wages don't contribute to inflationary pressures. "This is what the Fed is afraid of.. that the economy is not fully cooled enough to derail inflation," Diane Swonk, KPMG LLC US Chief Economist told Seeking Alpha.
Labor gap
The dislocation between the supply and demand in labor can be seen in the Job Openings and Labor Turnover data. In December, the number of job openings unexpectedly rose to just over 11M vs. 10.4M in November. And with almost two job openings for every job seeker, that can lead to higher wages, Swonk said.
In January, Walmart (WMT), the nation's largest employer, said it's increasing its minimum wage for store employees to $14 per hour starting in March, up $2 from its prior hourly wage, according to reports.
The labor force participation, which has stayed stubbornly low since the pandemic, isn't helping. In December, it ticked up to 62.3%, from 62.2% in the previous month, but remains a full percentage point below its February 2020 level. Santangelo will be watching the labor force participation rate and how it breaks down by gender and race. "We know that the pandemic affected certain groups within the labor force differently than others," he said.
Zooming out
He'll also be looking at the U6 unemployment rate, which includes part-time workers and those marginally attached to the labor force, for a more complete picture. By that measure, the unemployment rate was 6.5% in December, down from 6.7% in November. In April 2020, during the height of the pandemic, U6 unemployment spiked to 22.9% compared with the headline unemployment rate of 14.7%.
January's data is likely to be noisy, KPMG's Swonk said. Typically, employers, especially retailers, tend to lay workers off in the first month of the year after the holiday rush. And with inflation receding some since its peak, she'll be looking for signs of "labor hoarding" by employers.
Also contributing to the noise is January's weather, when California dealt with historic flooding and winter storms swept through much of the Midwest and Northeast. Those may have prevented significant numbers of workers from getting to work. The number of workers out sick due and unable to work may also keep the number down, Swonk said, noting that COVID and flu are both factors.
With inflation top of mind for the Fed, worker pay will also be a focus of attention. The increase in average hourly earnings are also expected to cool as it laps high levels from a year ago. "The question is how much they cooled," Swonk said. The consensus is for 4.3% Y/Y increase vs. the 4.6% Y/Y rise seen in December.
Fed implications
Until the Fed's next monetary policy decision, there will be one more nonfarm payrolls report, two more consumer price index reports, and one more personal consumption expenditures report, each of which gives more insight into inflation dynamics.
On Wednesday, the Federal Open Market Committee said "ongoing" rate increases will likely "be appropriate." Powell said the committee was "talking about a couple more" hikes. Cutting rates this year is unlikely if the economy develops as expected, he added.
Currently, 30-day federal funds futures market has an 85.6% probability of another 25-bp increase at the March meeting, bringing the fed funds rate target range to 4.75%-5.0%, according to the CME FedWatch tool. For the Fed's December meeting, there's a 34.6% probability that the fed funds rate range will drop to 4.25%-4.50% and a 29.1% probability it will be at 4.50%-4.75%, its current level.
"It's a war of wills" between the Fed and financial markets, said KPMG's Swonk. The central bank "has to double down on their commitments to raise rates and actually raise them," she said. At Wednesday's Fed press conference, Chair Powell said the policymakers have "more work to do" and warned against complacency.
See why SA contributor Damir Tokic expects the January payroll report will confirm an imminent recession.
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So much winning for the middle class. If only we all sold stocks when every Fed member did in Sept '21
