The Fed too will have to wait
It’s only a week into 2023 and we’ve already received some important economic data points. See below for our thoughts on the latest Labor report.
The US labor market added slightly more than 200k jobs in December, almost exactly in line with the consensus forecast. The unemployment rate fell to a cycle low of 3.5%, while wage growth was slightly lower than expected. Almost all major industry groups are adding jobs on net; the one exception is professional and business services which is consistent with the headlines we see about tech firms shedding workers. But the number of jobs lost in the tech industry pales in comparison to the additions in healthcare and leisure/hospitality.
The totality of the information we received this morning makes clear that the labor market is still very far from equilibrium. While there is some moderation in most indicators over the last few months, that moderation is off from the extraordinarily strong conditions post-pandemic.
Wages slow down but not enough
Average hourly earnings were lower than expected this month, largely due to downward revisions to last month, but they continue to increase at a rate inconsistent with achieving the 2% inflation target. The composition of hiring may have something to do with the ongoing deceleration in wages. Tech jobs pay more than jobs in the healthcare industry or travel/leisure, and so the addition of more lower-paying jobs at the expense of higher-paying ones likely has something to do with decelerating wage gains for the economy as a whole. Other measures of wages are not decelerating as quickly in any case, so we wouldn’t read too much into the deceleration in average hourly earnings in isolation.
Another partial explanation for slowing wage growth is a likely reduction in overtime pay. Average weekly hours worked fell by 0.1 to 33.8. This series spiked in the aftermath of COVID as businesses extended the hours of their employees to meet robust demand. With demand now faltering, the need to keep workers for longer is diminishing, and average weekly hours reflect that. That likely means that fewer workers are earning overtime pay, which tends to be at a higher wage rate than regular hours, and as a result, overall wages may be lower. Still, the current 33.8 hours per week is the highest ex-pandemic print in the last 10 years, so the decline in hours worked certainly shouldn’t be interpreted as a true weakening of the labor market.
Where to from here?
The direction of travel is toward a softer labor market, but there is a very long way to go before the Fed will be convinced that the employment situation is consistent with sustainably achieving the inflation target. Today’s numbers don’t show significant progress along that path—we will need to see numbers much weaker than today’s data in order for the labor market to rebalance sustainably. More specifically, it won’t be until hiring falls below 100k per month that the labor market will be weakening—for now it is merely strengthening at a slower pace.
The latest number leaves the FOMC likely to raise rates by either 25 or 50 b.p. at the next meeting in February (2/1), with the next inflation print likely to determine which outcome prevails. At least one more rate hike will follow the one at the March 22nd meeting, with a more extended cycle possible if hiring doesn’t slow significantly in the near future.
One more thought
With each of hiring, wages, and hours worked moderating, the nominal household paycheck is also moderating. That said, it is still growing at more than 7% per year, which is the strongest (ex-pandemic) rate of growth we have seen in decades. That illustrates the magnitude of the challenge that the Fed faces in bringing the labor market back into balance—there is still a very, very long way to go.
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