The Market Today

Payroll Growth Disappoints in December; Unemployment Rate Shows Tight Labor Market

by Craig Dismuke, Dudley Carter

Nonfarm Payrolls Disappoint in December: Nonfarm payrolls recovered just 199k in December, below expectations for adding 450k.  This marked the weakest rate of recovery since December 2020 and left payrolls still 3.57 mm below their pre-pandemic level.  The report covered the December 5 to 11 reference week, prior to the significant spike in COVID-19 cases from the Omicron wave.  The sector details showed mixed results including positive gains for construction and manufacturing but weakness in other areas.  Government jobs fell 12k, the retail sector lost 2k payrolls, education and healthcare gained just 10k, and the leisure sector added only 53k.  Only 7k education jobs were recovered, still down 704k since the beginning of the pandemic.  Food and dining services payrolls gained 43k but remained 653k below their pre-pandemic level.  There continued to be seasonal adjustment noise affecting the headline results.  From 2014 to 2019, the average seasonal adjustment applied to December results was +375k.  The December 2021 seasonal adjustment was just +127k. One positive note, the previous two months’ reports were revised up 141k collectively.

Unemployment Rate Drops Below Fed’s Longer-Run Rate: In the household report, the unemployment rate fell from 4.20% to 3.89% as 651k more people reported as employed, 483k fewer people reported as unemployed, and 168k more people reported as being in the labor force.  The unemployment rate is now at its lowest of the pandemic and below what the Fed views as being non-inflationary over the longer run (4.0%).  The moderate increase in workers in the labor force kept the participation rate unchanged at 61.9%.  In a note accompanying the report, the BLS noted that only 3.1mm people reported “that they had been unable to work because their employer closed or lost business due to the pandemic–that is, they did not work at all or worked fewer hours at some point in the 4 weeks preceding the survey due to the pandemic.”  This was down from 3.6mm in November.

Wage Growth Remains Concerningly Hot: The tight labor market continued to translate into stronger wage growth.  Average hourly earnings rose 0.6% MoM, above economists’ expectations for a 0.4% gain.  On a year-over-year basis, earnings were up 4.7% versus expectations for 4.2%.  The wage pressure was broad across almost all sectors.

Household Revisions: As is customary with the close of each calendar year, the BLS revised the seasonal factors it uses to adjust the household survey data, the source of the participation and unemployment rates, as part of today’s report for December. This year’s revision covered the period from January 2017 through November 2021. While this resulted in 0.1% revisions to the unemployment rate in January 2021 (+0.1%), April (-0.1%), and September (-0.1%), there was no effect on the unemployment rate in November or in today’s report for December.

Policy Impact: With job openings still at historically high levels, the weakness in nonfarm payroll recovery still appears to be labor supply driven rather than an issue of demand for workers.  Fed officials will likely be concerned by the unemployment rate falling below their longer run rate so quickly while hourly earnings are rising faster than expected.  On balance, this report is likely to add to the recently evident urgency from Fed officials to reverse policy. While the report is pre-Omicron, the newest COVID-19 wave is only likely to exacerbate the imbalance in the labor market.


ISM Services Index Dropped Sharply As Activity Slowed, Employment Softened, and Supplier Delays Improved: The ISM Services Index fell from a series record 69.1 to 62.0 in December, disappointing expectations for a smaller pullback to 67.0. December’s level was the lowest in three months but higher than the average reading for the first half of the year and historically strong. New orders slid 8.2 points to a ten-month low of 61.5. Business activity fell 7.0 points to a still respectable 67.6, its third highest level of the cycle and fourth strongest in records since 1997. Employment slipped to its second highest level since May. Notably, and consistent with results from the manufacturing report released earlier in the week, the supplier deliveries index fell sharply. The 11.8-point decline to 63.9, the lowest since March, signaled some potential easing in supply chain woes prior to Omicron’s rampant spread. The ISM, however, said businesses “continue to struggle with inflation, supply chain disruptions, capacity constraints, logistical challenges and shortages of labor and materials,” a succinct summation of the messaging from most entries in the comments section. Away from those key metrics, inventories contracted for a seventh month and prices paid inched up to the third highest level on record.

Factory Orders Report Edged Out Expectations on Boost from Transportation: Factory orders rose 1.6% in November, edging out expectations for a 1.5% improvement, and October’s 1.0% gain was revised up to 1.2%. However, stripping out a 1.1% improvement in auto-related orders and gains for both private and defense aircrafts, the 0.8% improvement across other categories came up short of the 1.1% expected increase. Revisions to initial estimates of capital goods orders and shipments, which are used to track business investment in equipment, were negligible. Core capital goods orders were flat in December, not down 0.1% as initially estimated, while shipments rose 0.3%, in line with the earlier projection.

Daly Differentiates Between Short-Term and Long-Term Success, Supported Faster Taper: After Minneapolis Fed Bank President Kashkari said he supported two rate hikes this year, San Francisco Fed President Daly became a top contender for the official who projected just one 2022 hike in December’s dot plot. Daly described the labor market as “very strong,” but not tight, pointing to the millions of jobs still missing and the sluggish recovery for participation. While the economy appears to be “closing in” on achieving the Fed’s two targets, she noted, “There’s a difference in the short run and the long run,” saying that “balancing those…will be the critical point of business for monetary policy” this year. Speeding up the tapering process felt “very appropriate,” she said, but “that’s a very different conversation than reducing our balance sheet; that would come after we’ve already begun to normalize the Fed funds rate.”

Bullard Says March Is Live for A Rate Hike, Balance Sheet Runoff Could Soon Follow: St. Louis Bank President Bullard said the Fed could begin raising rates “as early as the March meeting in order to be in a better position to control inflation” if it “does not naturally moderate as much as currently anticipated.” He later reiterated on a call with reporters that a March hike is a “definite possibility.” Bullard’s comments were not a surprise considering his role as one of the most hawkish voices on the Fed. He went on to say that “subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments.” Once net asset purchases end, Bullard said, officials “could also elect to allow passive balance sheet runoff in order to reduce monetary accommodation at an appropriate pace” and limit the need for faster rate hikes.

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Stocks Struggle As Rate Rise Persists: U.S. equities attempted to rebound Thursday but fell into the close as pressure from rising interest rates persisted. The S&P 500 recovered from an early stumble and spent most of the day in positive territory. Weakness in the final hour, however, dragged the index down 0.1% by the close. Sector results were mixed as energy companies gained 2.3% and financials rose 1.6% while the two most heavily weighted industries, information technology and health care, declined. The Dow fell 0.5% and the Nasdaq inched 0.1% lower. The Dow and S&P 500 hit records earlier this week but have since retreated amid the sharp rise in interest rates. Treasury yields jumped markedly following the Wednesday release of the hawkish minutes from the Fed’s December meeting and rose further on Thursday ahead of today’s jobs report. The 2-year yield climbed 4.0 bps to 0.87%, a high since March 3, 2020. The 5-year yield rose 3.9 bps to 1.47%, its highest level since January 28, 2020. The 10-year yield inched up 1.6 bps to 1.72% after earlier breaking above its March 31, 2021 high of 1.74%.

Global markets remained cautious and were mixed again on Friday as investors awaited December’s jobs report to cap off a volatile week of trading to start the new year. Equities were mixed in Asia before Europe’s Stoxx 600 dipped 0.3%, leaving U.S. index futures flat to up 0.2% before 7 a.m. CT. European yields were modestly higher following mixed economic data. Retail sales rose 1.0% in Europe in November, surprising expectations for a 0.5% decline. Economic confidence, however, edged down more than anticipated in December to a seven-month low amid Omicron’s surge and inflation was stronger than projected. Headline inflation accelerated unexpectedly from 4.9% to a new record 5.0% while core inflation held at a record 2.6% instead of easing to 2.5% as economists forecasted. The ECB has been comparatively dovish, with President Lagarde saying a rate hike this year is unlikely. Immediately before the jobs data, equity index futures were essentially flat, the 2-year yield was 1.5 bps higher at 0.88%, and the 10-year yield had risen 2.0 bps to 1.74%. Stocks sold off and Treasury yields climbed further after the labor data signaled further tightening of the jobs market.

ICYMI – 2021 Year-In-Charts – A Year To Rival 2020: 2021 was another eventful year including three COVID-19 waves, a third wave of direct stimulus payments, expansion of the economy but imbalances throughout, a lagging labor recovery, the hottest inflation since the early 1980s, and a substantial pivot from the Fed. We recap the highlights of the year in our 2021 Year-in-Charts. (links: video, chartbook

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