December Jobs Report As Good As It Gets

Stocks were broadly lower yesterday on a decline in weekly unemployment claims and a stronger-than-expected ADP payroll number of 235,000 for December. The perceived strength of the labor market is unnerving investors who are concerned it will encourage the Fed to keep raising interest rates, despite signs that the rate of inflation is starting to decline more rapidly. Still healthy job gains, low unemployment, and a historically high level of job openings argue that wage growth will remain elevated, which could fuel additional demand for goods and services that drives up prices. The logic is simple, but this labor market is as unusual as is this post-pandemic business cycle and not as strong as perceived.

The rate of job growth has slowed dramatically over the past year, as seen below, while the quality of the jobs being created is deteriorating at the same time. We’re losing high-paying jobs in the tech, manufacturing, and finance industries. Meanwhile, my daughter, who is a senior in college, just picked up a part-time job last month waiting tables to make a few extra bucks before she graduates. One investment banker or software sales associate does not equate to one part-time waitress position, but in the eyes of the Bureau of Labor Statistics they’re all the same.

This anecdote rings true in the ADP jobs data, which revealed that the 151,000 jobs shed by the largest companies was the largest number since April 2020. New hires were predominately by businesses with fewer than 500 employees and led by the leisure and hospitality industry. The report also showed a sharp deceleration in wage gains for both existing workers and those who changed jobs.

Indeed’s wage tracker follows pay for job postings, which is a good leading indicator of actual wage gains, as can be seen below. It rose markedly in early 2021 well before the increases realized in the Atlanta Fed’s wage monitor, and it is has been decelerating since April of last year in a sign of what is to come.

This morning’s payroll report from the Bureau of Labor Statistics told the same story as yesterday’s ADP report. The economy created 233,000 jobs, which was down from November’s 263,000 in a continuation of job growth deceleration. Furthermore, the prior two months of job gains was revised lower by a combined 28,000, which shows that the BLS is overestimating job gains. That is typical at turning points in the economy.

The leisure and hospitality industry led in new hires with 67,000 jobs, which are not high-paying positions. That was reflected in the sharp decline in wage growth from 5.1% in November to 4.6% in December, which was the smallest increase in more than a year. Equally as important, we saw a second consecutive monthly decline in the length of the workweek from 34.4 to 34.3 hours, which has a meaningful impact on take-home pay.

This jobs report is as good as it gets for the Federal Reserve. Ignore the unemployment rate of 3.5%. The rate of job creation is slowing but not falling off a cliff, which keeps the expansion on track. At the same time, the rate of wage increases is declining and the length of the workweek is shrinking, which should limit the upside pressure on inflation. This is what we need to see for the economy to navigate a soft landing in 2023.