As we near the end of the year, only a few critical economic releases remain. With headline CPI inflation having cooled to 3.2% from 6.5% last December, investor attention has started to shift to the Fed’s other mandate: the labor market.
This year saw surprising labor strength on multiple fronts: jobs added, jobs available, labor force participation, and an unemployment rate that is still below 4%. Still, a cooling has begun, but so far it’s been welcomed by markets and likely by the Fed. The last nonfarm payroll report that was released in early November came in below expectations at 150k jobs added, and the unemployment rate came in above expectations at 3.9%. The market cheered the cooling by declaring rate hikes a thing of the past, sparking a rally in stocks and Treasuries.
The next — and last of 2023 — jobs report will be released on Friday. Not only is this report important for confirming the cooling that markets welcomed in last month’s data, but it may set the stage for a cooler inflation print and, dare I say, less hawkish Fed statement the following week.
Not Weak, Less Strong
We’ve gotten some labor data this week that may serve as a precursor to Friday’s main event, and so far so good. There’s a typical sequence of cooling that appears to be underway — companies start by reducing the number of available jobs, then they cut back on hiring. The ideal scenario is that things get back into balance enough to prevent a large wave of layoffs and a resulting spike in the unemployment rate.
To track this, we watch the Job Openings (JOLTS) report for signs that companies are slowing down their hiring plans. That slowdown was further confirmed this week with job openings falling by 820k. The number of available jobs is still well above 2019 levels, so this drop is easily absorbed while keeping the overall picture healthy.
It may seem odd to be rooting for fewer job openings, but if we want the labor market to loosen enough to prevent a wage-price spiral , these reductions are helpful.
Another data point that came in weaker was the ADP Employment Report, which can be viewed as a preview to the official report from the Bureau of Labor Statistics. However, it’s worth noting that the ADP report has not served as a great indicator of what may come in the official data, but it moves markets nonetheless.
Turn, Turn, Turn
It’s clear that things are turning in the labor market, even if only a little bit. There’s been a subtle, but noticeable turn upward in the unemployment rate, and a steady grind higher in continuing jobless claims.
For now, we welcome the turn of events. Stocks and yields are accepting them with open arms, and that’s a rational reaction given the problem set of too-tight labor conditions we’ve been trying to solve for since late 2021. The most important problem to solve, however, will be cooling it enough to balance things out, but not too much that it destroys the situation.
This high-wire act is one we’re walking on numerous indicators: labor, inflation, and economic growth. Cool it off, but don’t freeze it. If the turns in data are reinforced with the remaining releases in 2023, I’d expect markets to remain optimistic in response. Next year is when we find out if we were able to slow down, but not stop.
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