Economic Update: Employment & Wage Growth

Job growth ended 2021 on a sour note, according to the latest monthly payrolls report from the U.S. Labor Department. Specifically, 199K payrolls were added to the economy in December, significantly below the consensus forecast and the weakest month for job growth of 2021.

The private sector was responsible for all of the job creation last month, whereas government payrolls fell by a net 12K.

As we predicted in an earlier blog post, though, seasonal adjustment volatility related to ongoing pandemic distortions resulted in sharp upward revisions to prior reports, with a net 141K additional payrolls being added to the November and October figures. However, this still left the 3-month average monthly job gain at just 365K, the slowest pace since February 2021. If the monthly employment rebound continued at this rate it would take roughly another 10 months to erase the remaining 3.6 million payrolls shortfall, and more than twice that long to get us back in line with pre-COVID trend growth.

Job creation “breadth” also weakened in December, with only 60 percent of sectors reporting net hiring during the month (down from 70 percent in November). Perhaps the most disappointing part of the weak headline payrolls figure, though, is that it occurred before the recent acceleration in COVID cases related to the omicron variant really even ramped up. Moreover, hiring in the services sector was especially weak last month, and this arena is much more sensitive to rolling virus concerns and therefore is likely to be under even more pressure in January. After being wrong for five months in a row, however, forecasters may overcorrect to the downside and lower their January predictions too much, in turn setting us up for a positive surprise when the next report is released in early February.

Let’s assume, though, that the next headline payrolls figure again severely disappoints forecasts. Some economists and market participants have argued that such a recent string of weakness alongside the spike in COVID cases will force the Federal Reserve to delay its tightening plans via slowing the pace of tapering and/or pushing back the date of the first rate hike. To me this is a flawed interpretation of recent Fed commentary because other areas of the economy continue to signal that we are in an inflationary boom (rising inflation and rising consumer spending), and we would therefore need to see a lot more than just a few months of weak headline payrolls growth to cause monetary policymakers to blink. Put simply, until Fed commentary suggests otherwise it is more likely that the FOMC going forward will treat spikes in COVID cases like a severe weather event (temporary economic setback).

More importantly, we need to remember that in the quarterly economic projections released by the FOMC, the committee does not even forecast job growth but instead the unemployment rate, which tumbled in December. Indeed, the most popular measure of national joblessness (U-3) fell to 3.9 percent last month, the first sub-4.0 reading since the pandemic began and therefore back in the range when the Fed was already considering raising interest rates. To be fair the fact that unemployment is nearing pre-COVID norms while total employment is still well short of comparable levels highlights how many workers have fallen out of the labor force this crisis, e.g. early retirements, childcare challenges. Moreover, assuming we had a similar labor force participation rate as we did prior to the pandemic, the unemployment rate would be closer to 5 percent.

Fed officials are well aware of this, though, so until they signal otherwise it is better to assume they will use the headline unemployment rate as is, and with it already just fractionally above the committee’s year-end 2022 forecast it will take a lot of change on other economic fronts to nudge the Fed into walking back some of its recent hawkish rhetoric. With respect to inflation any material weakening is unlikely to occur in the immediate future, in part because the disruptions caused by the omicron spike may exacerbate the strain on certain supply chains once again (and boost goods demand, in turn further delaying the needed service sector rebound).

It is also unlikely that the upward pressure on inflation from wages is going to abate significantly prior to the March FOMC meeting. Indeed, in the December job report we learned that average hourly earnings for production and nonsupervisory employees in the private sector rose by 0.68 percent, a big jump from 0.46 percent in November and the largest monthly gain since April 2021. Further, hours worked remained elevated, and this combination of longer hours for existing employees and higher wages has kept aggregate weekly payrolls on their pre-Covid trend despite the lingering jobs shortfall. We also saw that wage growth in lower-paying industries has slowed since the summer and picked up in higher-wage industries, perhaps a sign of wage growth breadth improving, i.e. faster wage growth spreading out.

Some have dubbed this environment the “Great Renegotiation” as more workers are demanding higher wages in part due to elevated confidence in the ability to find other employment opportunities. Such opportunities appear to include working for oneself because the number of self-employed Americans is currently around 4 percent above the pre-pandemic level, whereas traditional payroll employment remains roughly 3 percent below the prior peak. So altogether the near-term path of employment and wage growth in America is likely to continue to depend firmly on the availability of labor.

What To Watch This Week:

Monday

  • Martin Luther King, Jr. Day
  • All markets closed

Tuesday

  • 3-Yr Note Settlement
  • 10-Yr Note Settlement
  • 30-Yr Bond Settlement
  • Empire State Manufacturing Index 8:30 AM ET
  • Housing Market Index 10:00 AM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • Housing Starts and Permits 8:30 AM ET
  • 20-Yr Bond Auction 1:00 PM ET

Thursday

  • Jobless Claims 8:30 AM ET
  • Philadelphia Fed Manufacturing Index 8:30 AM ET
  • Existing Home Sales 10:00 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • EIA Petroleum Status Report 11:00 AM ET
  • 2-Yr Note Announcement 11:00 AM ET
  • 5-Yr Note Announcement 11:00 AM ET
  • 7-Yr Note Announcement 11:00 AM ET
  • 10-Yr TIPS Auction 1:00 PM ET

Friday

  • Leading Indicators 10:00 AM ET
  • Baker Hughes Rig Count 1:00 PM ET

References

  • Johannes Matschke and Sai A. Sattiraju. 2021. “Labor Markets Are Tight, but Conditions Vary across States.” Federal Reserve Bank of Kansas City, Economic Bulletin, December 22.

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