Tag: Labor Market

Blowout U.S. Jobs Report Keeps Fed on Hawkish Path, For Now

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market showed no signs of cooling in March, with employers adding a whopping 303,000 new jobs last month while the unemployment rate fell to 3.8%. The much stronger-than-expected employment gains provide further evidence of the economy’s resilience even in the face of the Federal Reserve’s aggressive interest rate hikes over the past year.

The blockbuster jobs number reported by the Bureau of Labor Statistics on Friday handily exceeded economists’ consensus estimate of 214,000. It marked a sizeable acceleration from February’s solid 207,000 job additions and landed squarely above the 203,000 average over the past year.

Details within the report were equally impressive. The labor force participation rate ticked up to 62.7% as more Americans entered the workforce, while average hourly earnings rose a healthy 0.3% over the previous month. On an annualized basis, wage growth cooled slightly to 4.1% but remains elevated compared to pre-pandemic norms.

Investors closely watch employment costs for signs that stubbornly high inflation may be becoming entrenched. If wage pressures remain too hot, it could force the Fed to keep interest rates restrictive for longer as inflation proves difficult to tame.

“The March employment report definitively shows inflation remains a threat, and the Fed’s work is not done yet,” said EconomicGrizzly chief economist Jeremy Hill. “Cooler wage gains are a step in the right direction, but the central bank remains well behind the curve when it comes to getting inflation under control.”

From a markets perspective, the report prompted traders to dial back expectations for an imminent Fed rate cut. Prior to the data, traders were pricing in around a 60% chance of the first rate reduction coming as soon as June. However, those odds fell to 55% following the jobs numbers, signaling many now see cuts being pushed back to late 2024.

Fed chair Jerome Powell sounded relatively hawkish in comments earlier this week, referring to the labor market as “strong but rebalancing” and indicating more progress is needed on inflation before contemplating rate cuts. While the central bank welcomes a gradual softening of labor conditions, an outright collapse is viewed as unnecessarily painful for the economy.

If job gains stay heated but wage growth continues moderating, the Fed may feel emboldened to start cutting rates in the second half of 2024. A resilient labor market accompanied by cooler inflation pressures is the so-called “soft landing” scenario policymakers are aiming for as they attempt to tame inflation without tipping the economy into recession.

Sector details showed broad-based strength in March’s employment figures. Healthcare led the way by adding 72,000 positions, followed by 71,000 new government jobs. The construction industry saw an encouraging 39,000 hires, double its average monthly pace over the past year. Leisure & hospitality and retail also posted healthy employment increases.

The labor market’s persistent strength comes even as overall economic growth appears to be downshifting. GDP rose just 0.9% on an annualized basis in the final quarter of 2023 after expanding 2.6% in Q3, indicating deceleration amid the Fed’s rate hiking campaign.

While consumers have remained largely resilient thanks to a robust labor market, business investment has taken a hit from higher borrowing costs. This divergence could ultimately lead to payroll reductions in corporate America should profits come under further pressure.

For now, however, the U.S. labor force is flexing its muscles even as economic storm clouds gather. How long employment can defy the Fed’s rate hikes remains to be seen, but March’s outsized jobs report should keep policymakers on a hawkish path over the next few months.

Red Hot Labor Market as U.S. Employers Add 184,000 Jobs in March

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market showed no signs of cooling in March, with private employers boosting payrolls by 184,000 last month according to a report by payrolls processor ADP. The stronger-than-expected gain signaled the jobs machine kept humming despite the Federal Reserve’s aggressive interest rate hikes aimed at slowing the economy and conquering inflation.

The 184,000 increase was the largest monthly jobs number since July 2023 and topped economists’ estimates of 148,000. It followed an upwardly revised 155,000 gain in February. The vibrant report sets the stage for the government’s highly anticipated nonfarm payrolls release on Friday, with economists forecasting a still-solid 200,000 jobs were added economy-wide last month.

“March was surprising not just for the pay gains, but the sectors that recorded them,” said Nela Richardson, chief economist at ADP. “Inflation has been cooling, but our data shows pay is heating up in both goods and services.”

Indeed, wage pressures showed little evidence of easing last month. The ADP data showed annual pay increases for those keeping their jobs accelerated to 5.1%, matching the elevated pace from February. Workers switching jobs saw an even bigger 10% year-over-year jump in wages.

The stubborn strength of the labor market and still-elevated pace of wage increases complicates the Federal Reserve’s efforts to tame inflation, which has started to moderate but remains well above the central bank’s 2% target. Fed officials have signaled they likely have more interest rate hikes ahead as they try to dampen hiring and pay growth enough to fully wrestle inflation under control.

“The labor market remains surprisingly resilient despite the Fed’s tightening of financial conditions over the past year,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The strong March ADP gain suggests we’re not out of the woods yet on inflation pressures.”

Job growth in March was fairly broad-based across sectors and company sizes. The leisure and hospitality sector continued to be a standout, adding 63,000 new positions as Americans kept splurging on travel and entertainment. Construction payrolls increased by 33,000, while the trade, transportation and utilities sectors combined to add 29,000 workers.

Hiring was also widespread geographically, with the South leading the way by adding 91,000 new employees. The data showed bigger companies with over 50 workers accounted for most of the overall job gains.

One blemish was the professional and business services sector, which cut payrolls by 8,000 in a potential sign of some pockets of weakness emerging amid higher borrowing costs.

While the ADP report doesn’t always sync perfectly with the government’s more comprehensive employment survey, it adds to recent signs that a long-predicted U.S. economic downturn from the Fed’s inflation-fighting campaign has yet to fully materialize. The labor market has remained extraordinarily buoyant, with job openings still far exceeding the number of unemployed and layoffs staying low.

Economists expect Friday’s jobs report to show the unemployment rate held steady at 3.9% in March. If confirmed, it would mark over a year since joblessness was last below 4%, an extremely tight labor market that has forced many companies to raise wages at an unusually rapid clip in order to attract and retain workers.

With paychecks still climbing at a relatively elevated pace, the Fed worries inflationary pressures could become entrenched in the form of a self-perpetuating wage-price spiral. That fear raises the risk the central bank could opt for even higher interest rates, potentially increasing recession risks.

Job Market Stays Resilient as Openings Hold Steady

Posted on by slightbourne@noblecapitalmarkets.com

The latest employment data shows the resilience of the US labor market, even as the Federal Reserve remains locked in an inflation battle. The number of job openings across the country was essentially unchanged in February at 8.76 million, according to the Job Openings and Labor Turnover Survey (JOLTS) released by the Labor Department.

While just a slight 0.1% uptick from January’s revised 8.75 million openings, the figure highlights how robust hiring demand remains from employers over a year into the Fed’s interest rate hiking campaign. Job vacancies have been sticky at extremely elevated levels, leaving Fed officials frustrated in their efforts to ease wage growth and inflationary pressures.

“The labor market continues to defy expectations of a meaningful cooling,” said Samantha Gunther, economist at Credence Economics. “With openings still so high, wage growth is likely to remain too strong for the Fed’s liking in the months ahead.”

The JOLTS data precedes this week’s highly anticipated March jobs report, which is forecast to show nonfarm payrolls increased by 230,000 positions. That would mark a fourth straight month of job gains over 200,000, underscoring the employment market’s enduring tightness.

There were some modest signs of a gradual loosening in labor conditions buried within February’s openings figures. Job vacancies fell in sectors like information, healthcare and retail trade. More notably, the overall level of layoffs jumped to 1.8 million, the highest since last April, led by a spike in the leisure and hospitality industry.

“While the bar remains high for calling a turn in the labor cycle, we’re seeing some initial hints of cracks starting to form,” said Ryan Bingham, lead labor economist at ADP. “Higher borrowing costs are clearly starting to bite for certain service-sector businesses.”

The report also showed rates of workers quitting their jobs to pursue other opportunities held steady at 2.2% in February, the lowest since the summer of 2020. The diminished quits rate could indicate employees are feeling less confident about switching roles in a more uncertain economic climate.

Another indicator pointing to some easing was the ratio of available workers to job openings, which slipped to 1.36 from 1.43 in January. While still a very tight ratio favoring employers over job seekers, it marked progress toward better balance after peaking above 2-to-1 last year.

For the Fed, the upshot is likely more patience in leaving interest rates elevated. Chair Jerome Powell reiterated last week that stronger labor market “gives” would be needed to bring down unacceptably high inflation back toward the 2% goal.

With payroll growth expected to remain solid and job openings still extremely elevated, it will take more time before productivity-enhancing labor slack emerges. The latest JOLTS figures suggest that process is underway, however gradual it may prove to be.

Elevated Inflation Readings Complicate Fed’s Rate Cut Timeline

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve’s efforts to tame stubbornly high inflation are facing a fresh challenge, as new economic data released on Thursday showed price pressures are proving more persistent than expected. The latest inflation readings are likely to reinforce the central bank’s cautious approach to cutting interest rates and could signal that borrowing costs will need to remain elevated for longer in 2024.

The new inflation report came from the Labor Department’s Producer Price Index (PPI), which measures the prices businesses receive for their goods and services. The PPI climbed 0.6% from January to February, accelerating from the prior month’s 0.3% rise. Even more concerning for the Fed, core producer prices excluding volatile food and energy components rose 0.3% month-over-month, higher than the 0.2% increase forecast by economists.

On an annual basis, core PPI was up 2% compared to a year earlier, matching January’s pace but exceeding expectations. The stubbornly elevated core figures are particularly worrisome as the Fed views core inflation as a better gauge of underlying persistent price trends.

“Given the stickier than expected nature of inflation, it’s going to be very difficult for the Fed to justify a near-term rate reduction,” said Lindsey Piegza, chief economist at Stifel. “Our base case is that the Fed holds off to the second half of the year before initiating a change in policy.”

The hotter-than-anticipated producer inflation data follows a similarly elevated reading for consumer prices earlier this week. The Consumer Price Index showed core consumer inflation rose 3.8% over the past 12 months in February, also surpassing economist projections.

The back-to-back upside inflation surprises underscore the challenges the Fed faces in its efforts to wrestle price growth back down to its 2% target rate after it reached 40-year highs in 2022. Fed Chair Jerome Powell has repeatedly stressed that the central bank wants to see convincing evidence that inflation is moving “sustainably” lower before easing its monetary policy stance.

In the wake of Thursday’s PPI report, market expectations for the timing of a first Fed rate cut this year shifted slightly. The odds of an initial rate reduction happening at the June meeting dipped from 67% to 63% according to pricing in the fed funds futures market. As recently as earlier this year, many investors had anticipated the first cut would come as soon as March.

The Fed is widely expected to leave interest rates unchanged at the current 5.25%-5.5% range when it concludes its next policy meeting on March 22nd. However, officials will also release updated economic projections and interest rate forecasts, and there is a possibility some could scale back expectations for rate cuts in 2024 given the persistent inflation data.

In December, Fed policymakers had penciled in approximately three quarter-point rate reductions by year-end 2024 based on their median forecast. But the latest inflation figures cast doubt on whether that aggressive easing will ultimately materialize.

“This does leave a degree of uncertainty as to when they cut first and what they’ll do on the dot plot,” said Wil Stith, a bond portfolio manager at Wilmington Trust. “Will they leave it at three cuts or will they change that?”

Former Fed official Jim Bullard downplayed the significance of any single month’s inflation reading, but acknowledged the broad trajectory remains difficult for policymakers. “A little bit hot on the PPI today, but one number like this probably wouldn’t affect things dramatically,” he said.

With inflation proving more entrenched than hoped, the Fed appears set to maintain its policy restraint and leave interest rates at restrictive levels until incoming data provides clear and consistent evidence that the central bank’s battle against rising prices is being won. Consumers and businesses alike should prepare for higher borrowing costs to persist in the months ahead.

Job Growth Exceeds Expectations, but Raises Questions on Economy’s Path

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market turned in another solid performance in February, adding 275,000 new jobs and keeping the unemployment rate near historic lows. However, mixed signals within the employment report raised more questions than answers about the strength of the economy and the Federal Reserve’s next policy moves.

The 275,000 increase in non-farm payrolls topped economists’ expectations of 198,000 and showed hiring picked up after January’s downwardly revised 229,000 gain. The unemployment rate ticked higher to 3.9%, as more Americans entered the labor force but couldn’t immediately find jobs.

While the headline job growth was robust, details within the report revealed some potential red flags. Revisions slashed 167,000 jobs off the initially reported totals for December and January, indicating the labor market wasn’t quite as sturdy late last year as originally thought.

Additionally, wage growth is moderating after a strong run in 2022. Average hourly earnings rose just 0.1% for the month, undershooting forecasts, and are up 4.3% over the past year versus 4.5% year-over-year in January. Slower wage growth could ease inflation pressures but also signals softer labor demand.

“This jobs report has something for everyone in terms of economic narratives,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “You can view it as evidence the economy is weakening and a recession could be coming, or that it’s a Goldilocks scenario with solid growth and contained inflation.”

The details were undeniably mixed. Full-time jobs decreased, while part-time positions increased. And while the unemployment rate rose, measures of labor force participation also ticked higher, indicating workers are returning from the sidelines.

Industry hiring patterns reinforced the muddy economic picture. Healthcare companies led with 67,000 new jobs last month, while the government added 52,000 positions. Those stable healthcare and public sector gains were offset by disappointments in interest-rate sensitive areas like construction (23,000) and manufacturing, which saw a decline.

The spending side of the economy showed signs of life, with restaurants/bars adding 42,000 jobs and retailers hiring 19,000. But some of those consumer-facing gains could simply reflect volatility after January’s weather disruptions.

From an investing standpoint, the conflicting data raises uncertainty around the Fed’s rate path and the probability of a recession arriving in the next 12-18 months. Prior to the release, markets had priced in the Fed’s first rate cut in March based on signs of economic slowing.

However, the February jobs figures, combined with recent hawkish Fed rhetoric, shifted rate cut expectations to June or even July. Traders now see around 4 quarter-point cuts this year, down from upwards of 6-7 cuts priced in previously.

Dan North, senior economist at Allianz Trade Americas, said the nuanced report likely “doesn’t change the narrative” for the Fed in the near-term. “We’re still growing jobs at a good pace, and wages, while elevated, have come down a bit,” he said. “The Fed has more wood to chop, but the path towards easier policy is still visible on the horizon.”

For equity investors, the employment crosscurrents create a murky outlook that will require close monitoring of upcoming data points. On one hand, continued job creation supports consumer spending and Corporate America’s ability to preserve profit margins through the year.

The risk is that the Fed overtightens policy, doesn’t cut rates quickly enough, and the still-resilient labor market tips into contraction. That could increase recession odds and put downward pressure on revenue and earnings forecasts.

When job reports deliver contradictory signals, the prudent investment strategy is to prepare for multiple scenarios. Building defensive portfolio positions and rebalancing asset allocations can provide insulation if economic conditions deteriorate faster than expected. At the same time, holding core positions in quality companies can allow for participation if solid labor markets translate into better-than-feared growth.

Mixed economic data opens the door to increased market volatility. And in that environment, disciplined investing, active management, and opportunistic portfolio adjustments often become critical drivers of long-term returns.

Job Market Remains Resilient Despite Cooling Pace of Hiring

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. job market continues to display remarkable resiliency, even as the blistering pace of hiring has started to moderate from the torrid levels seen over the past couple of years. The latest employment data suggests that while businesses may be tapping the brakes on their aggressive hiring sprees, the overall labor landscape remains favorable for job seekers.

According to the ADP National Employment Report released on March 6th, private sector employment increased by 140,000 jobs in February. While this figure fell short of economists’ projections of 150,000 new jobs, it represents a solid uptick from the upwardly revised 111,000 jobs added in January. The leisure and hospitality sector led the way, tacking on 41,000 positions, followed by construction (28,000) and trade, transportation and utilities (24,000).

The ADP report, which is derived from payroll data, serves as a precursor to the highly anticipated monthly Employment Situation report issued by the Bureau of Labor Statistics (BLS). Economists anticipate that the BLS data, set for release on March 10th, will reveal an even more robust job gain of around 198,000 for February.

This sustained momentum in hiring underscores the enduring strength of the U.S. labor market, even as the Federal Reserve’s aggressive interest rate hikes aimed at taming inflation have stoked concerns about a potential economic downturn. The resilience of the job market has been a crucial bulwark against recessionary forces, buttressing consumer spending and overall economic growth.

However, there are signs that the once-blazing hot job market is starting to cool, albeit in a relatively controlled and gradual manner. The number of job openings, a key indicator of labor demand, has steadily declined from its peak of 12 million in March 2022 but remains elevated at nearly 8.9 million as of January, according to the latest Job Openings and Labor Turnover Survey (JOLTS) report.

This gradual tapering of job openings suggests that employers are becoming more judicious in their hiring practices, potentially a reflection of the broader economic uncertainty and the lagging effects of the Fed’s rate hikes. Nevertheless, the fact that openings remain well above pre-pandemic levels highlights the continued tightness of the labor market.

Moreover, the JOLTS data revealed a modest decline in the number of voluntary quits, often viewed as a barometer of workers’ confidence in their ability to secure better employment opportunities. While still historically high, the dip in quits could signal that some of the exceptional job-hopping dynamics that characterized the pandemic era are beginning to normalize.

From an investor’s perspective, the persistent strength of the job market, coupled with gradually decelerating inflation, presents a Goldilocks scenario – an economy that is neither running too hot nor too cold. This environment could potentially extend the current economic expansion, providing a favorable backdrop for corporate profitability and stock market performance.

However, investors should remain vigilant for any signs of a more pronounced slowdown in hiring or a significant uptick in layoffs, which could presage a broader economic downturn. Moreover, the Fed’s policy path remains a crucial variable, as overly aggressive rate hikes aimed at vanquishing inflation could potentially undermine the job market’s resilience.

Overall, the latest employment data depicts a job market that, while losing some of its blistering momentum, remains remarkably sturdy and continues to defy expectations of an imminent downturn. For investors, this Goldilocks scenario could prolong the economic cycle, but close monitoring of labor market dynamics and the Fed’s policy trajectory will be essential in navigating the road ahead.

JOLTS Report Shows Ongoing Labor Market Tightness

Posted on by slightbourne@noblecapitalmarkets.com

The latest Job Openings and Labor Turnover Survey (JOLTS) report released Tuesday by the Bureau of Labor Statistics showed job openings rose to 9.02 million in December, up from a revised 8.92 million in November. This was higher than economist forecasts of 8.75 million openings.

The December JOLTS report indicates ongoing tightness in the US labor market, as job openings remain stubbornly high even as the Federal Reserve has aggressively raised interest rates over the past year to cool demand and curb inflationary pressures.

On the surface, the rise in openings appears a negative sign for monetary policy aimed at loosening the jobs market. However, the increase was small, and openings remain well below the March 2023 peak of 11.9 million. The quits rate, which measures voluntary departures and is an indicator of workers’ confidence in ability to find new jobs, also edged down to 2.1% in December, though it remains elevated historically.

This suggests the Fed’s policy actions may be having a gradual effect, but the labor market remains tight overall. Layoffs also stayed low in December, with just 1.6 million separations due to layoffs or discharges during the month. The labor force participation rate ticked up to 62.3% in December, so labor supply is expanding somewhat, though participation remains below pre-pandemic levels.

For the Fed, the report provides ammunition on both sides of the debate as to whether a pause in rate hikes is warranted or further increases are needed to achieve a soft landing. Markets see a mixed bag, with the US dollar index largely unchanged on the day and Treasury yields seeing only slight moves following the release.

Impact on Economic Outlook

The bigger picture is that while job openings are declining, they remain unusually high, indicative of continued broad demand for workers across sectors like healthcare, manufacturing, and hospitality. Businesses appear eager to hire even amidst an economic slowdown and uncertainty about the outlook.

This need for workers will support consumer spending, the primary engine of US GDP growth, as long as hiring remains robust and layoffs low. But it also means upward pressure on wages as employers compete for talent, which could fuel inflation. Herein lies the conundrum for monetary policy.

The strength of the labor market is a double-edged sword – positive for growth in the near term, but concerning for the Fed’s inflation fight if it necessitates further large wage increases.

Chair Powell has been adamant the Fed’s priority is reducing inflation, even at the risk of economic pain. With the jobs market still hot in late 2023, further rate hikes seem likely at upcoming policy meetings absent a substantial cooling in inflation or rise in unemployment.

Payroll growth could slow in 2024 from levels above 400,000 per month in 2023, but demand remains too high relative to labor supply. The Fed wants meaningful softening in job openings and wage growth, which has yet to fully materialize. Unemployment would likely need to rise to the high 3% range or beyond to reduce wage pressures.

The JOLTS report provides important context on the state of the labor market amid crosscurrents in other economic data. Manufacturing has slowed and housing has declined, but consumers keep spending and job switching remains high. The Fed is unlikely to declare victory or shift to rate cuts with this conflicting mix of weak and resilient activity.

The path for monetary policy and markets will depend on which direction the trends in openings, wages, inflation and jobs growth tilt in coming months. For now, the JOLTS report gives the sense of an economy and labor market that are cooling gradually under the weight of higher rates rather than slowing precipitously.

Strong December Jobs Report Challenges Expectations of Imminent Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The Labor Department’s December jobs report reveals continued strength in the U.S. economy that defies expectations of an imminent slowdown. Employers added 216,000 jobs last month, handily beating estimates of 170,000. The unemployment rate remained low at 3.7%, contrary to projections of a slight uptick.

This hiring surge indicates the labor market remains remarkably resilient, even as the Federal Reserve wages an aggressive battle against inflation through substantial interest rate hikes. While many anticipated slowing job growth at this stage of the economic cycle, employers continue adding workers at a solid clip.

Several sectors powered December’s payroll gains. Government employment rose by 52,000, likely reflecting hiring for the 2024 Census. Healthcare added 38,000 jobs across ambulatory care services and hospitals, showing ongoing demand for medical services. Leisure and hospitality contributed 40,000 roles, buoyed by Americans’ continued willingness to dine out and travel.

Notable gains also emerged in social assistance (+21,000), construction (+17,000), and retail (+17,000), demonstrating broad-based labor market vitality. Transportation and warehousing shed 23,000 jobs, a rare weak spot amid widespread hiring.

Just as importantly, wage growth remains elevated, with average hourly earnings rising 0.4% over November and 4.1% year-over-year. This exceeds projections, signaling ongoing inflationary pressures in the job market as employers compete for talent. It also challenges hopes that wage growth would start moderating.

Financial markets reacted negatively to the jobs data, with stock index futures declining sharply and Treasury yields spiking. The strong hiring and wage numbers dampen expectations for the Fed to begin cutting interest rates in the first half of 2023. Traders now see reduced odds of a rate cut at the March policy meeting.

This report paints a picture of an economy that is far from running out of steam. Despite the steepest interest rate hikes since the early 1980s, businesses continue adding jobs at a healthy pace. Consumers keep spending as well, with holiday retail sales estimated to have hit record highs.

Meanwhile, GDP growth looks solid, inflation has clearly peaked, and the long-feared recession has yet to materialize. Yet the Fed’s priority is returning inflation to its 2% target. With the job market still hot, the path to lower rates now appears more arduous than markets anticipated.

The data supports the notion that additional rate hikes may be necessary to cool economic activity and tame inflation. However, the Fed also wants to avoid triggering a recession through overtightening, making its policy stance a delicate balancing act.

For most of 2023, the central bank enacted a series of unusually large 0.75 percentage point rate increases. But it downshifted to a 0.5 point hike in December, and markets once priced in rate cuts starting as early as March 2024. This jobs report challenges that relatively dovish stance.

While inflation is clearly off its summertime highs, it remains well above the Fed’s comfort zone. Particularly concerning is the continued strong wage growth, which could fuel further inflation. Businesses will likely need to pull back on hiring before the wage picture shifts significantly.

Despite market hopes for imminent rate cuts, the Fed has consistently stressed the need to keep rates elevated for some time to ensure inflation is well and truly tamed. This data backs up the central bank’s more hawkish messaging in recent weeks.

The strong December jobs numbers reinforce the idea that the economy enters 2024 on solid ground, though facing uncertainties and challenges on the path ahead. With inflation still lingering and the full impacts of rising interest rates yet to be felt, the road back to normalcy remains long.

For policymakers, the report highlights the delicate balancing act between containing prices and maintaining growth. Cooling the still-hot labor market without triggering a downturn will require skillful and strategic policy adjustments informed by data like this jobs report.

While markets may hope for a swift policy pivot, the Fed is likely to stay the course until inflation undeniably approaches its 2% goal on a sustained basis. That day appears further off after this robust jobs data, meaning businesses and consumers should prepare for more rate hikes ahead.

Job Openings Dip but Labor Market Remains Strong

Posted on by slightbourne@noblecapitalmarkets.com

The monthly Job Openings and Labor Turnover Survey (JOLTS) report released this week showed job openings decreased slightly to 8.79 million in November. While a decline from October’s total, openings remain historically high, indicating continued labor market strength.

For investors, the data provides evidence that the economy is headed for a soft landing. The Federal Reserve aims to cool inflation by moderating demand and employment growth, without severely damaging the job market. The modest dip in openings suggests its interest rate hikes are having the intended effect.

Openings peaked at 11.9 million in March 2022 as employers struggled to fill vacancies in the tight post-pandemic job market. The ratio of openings to unemployed workers hit nearly 2-to-1. This intense competition for workers drove up wages, contributing to rampant inflation.

Since then, the Fed has rapidly increased borrowing costs to rein in spending and hiring. As a result, job openings have fallen over 25% from peak levels. In November, there were 1.4 openings for every unemployed person, down from 2-to-1 earlier this year.

While hiring also moderated in November, layoffs remained low. This indicates companies are being selective in their hiring rather than resorting to widespread job cuts. Employers added 263,000 jobs in November, underscoring labor market resilience.

With job openings still elevated historically and unemployment at 3.7%, the leverage remains on the side of workers in wage negotiations. But the cooling demand takes pressure off employers to fill roles at any cost.

Markets Welcome Gradual Slowdown

Financial markets have reacted positively to signs of a controlled economic deceleration. Stocks rallied in 2023 amid evidence that inflation was peaking while the job market avoided a precipitous decline.

Moderating job openings support the case for a soft landing. Investors hope further gradual cooling in labor demand will help the Fed tame inflation without triggering a severe downturn.

This optimizes the backdrop for corporate earnings. While companies face margin pressure from elevated wages and input costs, strong consumer spending power has mitigated the impact on revenues so far.

The risk is that the Fed overtightens and causes an excessive pullback in hiring. Another JOLTS report showing a sharper decline in openings would sound alarm bells. But November’s modest drop eases fears.

All eyes are now on the timing of the Fed’s anticipated pivot to interest rate cuts. Markets hope easing begins in mid-2024, while the Fed projects cuts starting later this year. The path of job openings will influence its timeline.

Slower but sustained labor demand enables the central bank to maintain a steady policy course. But an abrupt downward turn would pressure quicker rate cuts to stabilize growth.

Sector Impacts

The cooling job market has varying implications across stock market sectors. Rate-sensitive high-growth firms like technology would benefit most from earlier Fed easing.

Cyclical sectors closely tied to economic growth, like industrials and materials, favor the steady flight path as it sustains activity while containing inflation. Financials also prefer the status quo for now, given the tailwind of higher interest rates.

Meanwhile, sectors struggling with worker shortages and wage pressures welcome moderating openings. Leisure and hospitality saw one of the steepest monthly declines in November after leading last year’s hiring surge.

But the pullback remains measured rather than extreme. This supports a soft landing that preserves economic momentum and corporate earnings strength, even as financial conditions tighten. With the Fed striking a delicate balance so far, investors’ hopes are high for an extended expansion.

Slowing Labor Market Still Relatively Strong Heading into 2024

Posted on by slightbourne@noblecapitalmarkets.com

The latest US jobs data released this week points to a cooling labor market as the country heads into 2024, although conditions remain relatively strong compared to historical averages. The Labor Department reported there were 8.7 million job openings in October, down significantly from 9.4 million in September and the lowest level since March 2021.

While job growth is moderating, the labor market retains a level of resilience as employers appear reluctant to lay off workers en masse despite economic uncertainties. The quits rate held steady in October, indicating many Americans still feel secure enough in their job prospects to leave current positions for better opportunities.

However, the days of workers having their pick of jobs may be over, at least for now. Job openings have declined in most sectors, especially healthcare, finance, and hospitality – fields that had gone on major hiring sprees during the pandemic recovery. This reversal follows a series of steep Fed interest rate hikes aimed at cooling runaway inflation by dampening demand across the economy.

So far the Fed seems to have achieved a soft landing for the job market. Employers added a steady 150,000 jobs in October and unemployment remains low at 3.7%. The most recent data is welcome news for the Fed as it tries to bring down consumer prices without triggering a recession and massive job losses.

Heading into 2024, economists expect monthly job gains will average around 170,000 – still solid but below 2023’s pace when the economy added over 400,000 jobs a month. Wage growth is anticipated to continue easing as well.

While layoffs remain limited for now, companies are taking a more cautious stance on hiring, noted Nela Richardson, chief economist at ADP. “Business leaders are prepared for an economic downturn, but they are not foreseeing the kind of massive job cuts that happened in past downturns,” she said.

Some sectors still hungry for workers

Certain sectors continue urgently hiring even as the broader labor market slows. Industries like healthcare and technology still report hundreds of thousands of open jobs. Despite downsizing at high-profile firms like Amazon, the tech sector remains starved for engineers, developers and AI talent.

Demand still outweighs supply for many skilled roles. “We have around 300,000 open computing jobs today versus an average of 60,000 open computing jobs before the pandemic,” said Allison Scott, Chief Research Officer at KLA.

Restaurants and the wider hospitality industry also plan to bulk up staffing after cutting back earlier this year. American Hotel & Lodging Association CEO Katherine Lugar expects hotels to hire over 700,000 workers in 2024.

Traffic, bookings and travel spending are rebounding. “As we continue working our way back, hiring has picked up,” Lugar noted.

Uncertainties Cloud 2024 Outlook

Economists warn many uncertainties persist around inflation, consumer spending and business sentiment heading into 2024. “The outlook for next year is tough to forecast,” said Oren Klachkin of Oxford Economics. “A lot hinges on whether the Fed can tame inflation without severely harming employment.”

While the Fed intends to keep rates elevated for some time, markets increasingly expect a rate cut in 2024 if inflation continues cooling and economic growth stalls.

For jobseekers and workers, 2024 promises slower but steadier hiring without the wage bidding wars and unprecedented quitting rates seen last year. However, landing a new job may require more effort amid mounting competition.

The days of an ultra-tight labor market may have passed, but for now at least, most employers still remain eager to retain and recruit staff despite the slowing economy. The soft landing continues, but turbulence could still be ahead.

Millions of Gig Workers May Be Missing from Monthly Jobs Data

Posted on by slightbourne@noblecapitalmarkets.com

Each month the U.S. Labor Department releases its closely-watched jobs report, providing key employment statistics that the Federal Reserve monitors to gauge the health of the economy. However, new research suggests these monthly figures may be significantly undercounting workers, specifically those in the rising “gig economy.”

Economists estimate the undercount could range from hundreds of thousands to as many as 13 million gig workers. This discrepancy suggests the labor market may be even tighter than the official statistics indicate, allowing more room for employment growth before hitting problematic levels of inflation.

Gig Workers Slip Through the Cracks

Gig workers, such as Uber drivers, freelancers, and casual laborers, often don’t consider themselves part of the workforce or even “employed” in the traditional sense. As a result, when responding to government labor surveys, they fail to identify themselves as active participants in the job market.

Researchers Anat Bracha and Mary Burke examined this response pattern by comparing informal work surveys with standard employment surveys. They uncovered a troubling gap where potentially millions of gig workers get missed each month in the jobs data.

For the Fed, Underestimating Tightness Raises Risks

For the Federal Reserve, accurate employment statistics are critical to promoting its dual mandate of stable prices and maximum employment. If the labor market is tighter than the data suggests, it could force Fed policymakers to act more aggressively with interest rate hikes to ward off inflationary pressures.

An undercount means the economy likely has more remaining labor supply before hitting problematic levels of inflation-fueling tightness. With more Americans able to work productively without triggering price hikes, the Fed may not need to cool off the job market as quickly.

Implications for Fed Policy Decisions

In recent years, the Fed has dramatically revised its estimates for full employment to account for the lack of rising inflation despite ultra-low unemployment. Recognizing millions more gig workers could further adjust views on labor market capacity.

According to the researchers, the uncounted gig workers indicate the economy has had more room to grow without excessive inflation than recognized. As a result, they argue the Fed’s benchmark for tight labor markets could be revised upwards, allowing for less aggressive rate hikes.

Gig Workforce Expected to Expand Post-Pandemic

The gig economy workforce has swelled over the past decade. But the COVID-19 pandemic triggered massive layoffs, confusing estimates of its true size.

As the economy rebounds, gig work is expected to continue expanding. Younger generations show a preference for the flexibility of gig roles over traditional 9-to-5 employment. Moreover, companies are incentivized to hire temporary contract laborers to reduce benefit costs.

Accurately capturing this crucial and expanding segment of the workforce in monthly jobs data is necessary for the Fed to make informed policy moves. The research highlights an urgent need to refine labor survey approaches to avoid missteps.

Adapting Surveys to Evolve with the Economy

Government surveys designed decades ago need to adapt to reflect the rapidly changing nature of work. Respondents should be explicitly asked whether they engage in gig work and probed on their monthly hours and earnings.

Modernizing measurement approaches could reveal a hidden bounty of untapped labor supply and productivity from gig workers. With more accurate insight into true employment levels, the Fed can better balance its dual goals and promote an economy that benefits all Americans.

Slower Job Growth in October Adds to Evidence of Cooling Labor Market

Posted on by slightbourne@noblecapitalmarkets.com

The October employment report showed a moderation in U.S. job growth, adding to signs that the blazing labor market may be starting to ease. Nonfarm payrolls increased by 150,000 last month, lower than consensus estimates of 180,000 and a slowdown from September’s revised gain of 289,000 jobs.

The unemployment rate ticked up to 3.9% from 3.8% in September, hitting the highest level since January 2022. Wages also rose less than expected, with average hourly earnings climbing just 0.2% month-over-month and 4.1% year-over-year.

October’s report points to a cooling job market after over a year of robust gains that outpaced labor force growth. The slowdown was largely driven by a decline of 35,000 manufacturing jobs stemming from strike activity at major automakers including GM, Ford, and Chrysler.

The United Auto Workers unions reached tentative agreements with the automakers this week, so some job gains are expected to be recouped in November. But broader moderation in hiring aligns with other indicators of slowing momentum. Job openings declined significantly in September, quits rate dipped, and small business hiring plans softened.

For investors, the cooling labor market supports the case for a less aggressive Fed as the central bank aims to tame inflation without triggering a recession. Markets are now pricing in a 90% chance of no rate hike at the December FOMC meeting, compared to an 80% chance prior to the jobs report.

The Chance of a Soft Landing Improves

The decline in wage growth in particular eases some of the Fed’s inflation worries. Slowing wage pressures reduces the risk of a 1970s-style wage-price spiral. This gives the Fed room to pause rate hikes to assess the delayed impact of prior tightening.

Markets cheered the higher likelihood of no December hike, with stocks surging on Friday. The S&P 500 gained 1.4% in morning trading while the tech-heavy Nasdaq jumped 1.7%. Treasury yields declined, with the 10-year falling to 4.09% from 4.15% on Thursday.

Investors have become increasingly optimistic in recent weeks that the Fed can orchestrate a soft landing, avoiding recession while bringing inflation back toward its 2% target. CPI inflation showed signs of moderating in October, declining more than expected to 7.7%.

But risks remain, especially with services inflation still running hot. The Fed’s terminal rate will likely still need to move higher than current levels around 4.5%. Any renewed acceleration in wage growth could also put a December hike back on the table.

Labor Market Resilience Still Evident

While job gains moderated, some details within October’s report demonstrate continued labor market resilience. The unemployment rate remains near 50-year lows at 3.9%, still below pre-pandemic levels. Labor force participation also remains above pre-COVID levels despite a slight tick down in October.

The household survey showed a gain of 328,000 employed persons last month, providing a counterweight to the slower payrolls figure based on the establishment survey.

Job openings still exceeded available workers by over 4 million in September. And weekly jobless claims remain around historically low levels, totaling 217,000 for the week ended October 29.

With demand for workers still outstripping supply, risks of a sharp pullback in hiring seem limited. But the October report supports the case for a period of slower job gains as supply and demand rebalances.

Moderating job growth gives the Fed important breathing room as it assesses progress toward its 2% inflation goal. For investors, it improves the odds that the Fed can achieve a soft landing, avoiding aggressive hikes even as inflation persists at elevated levels.

The FOMC Minutes Show Officials Divided on Need for More Rate Hikes

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve released the full minutes from its pivotal September policy meeting on Wednesday, providing critical behind-the-scenes insight into how officials view the path ahead for monetary policy.

The minutes highlighted a growing divergence of opinions within the Fed over whether additional large interest rate hikes are advisable or if it’s time to ease off the brakes. This debate reflects the balancing act the central bank faces between taming still-high inflation and avoiding tipping the economy into recession.

No Agreement on Further Tightening

The September gathering concluded with the Fed voting to lift rates by 0.75 percentage point for the third straight meeting, taking the federal funds target range to 3-3.25%. This brought total rate increases to 300 basis points since March as the Fed plays catch up to curb demand and cool price pressures.

However, the minutes revealed central bankers were split regarding what comes next. They noted “many participants” judged another similar-sized hike would likely be appropriate at upcoming meetings. But “some participants” expressed reservations about further rate increases, instead preferring to monitor incoming data and exercise optionality.

Markets are currently pricing in an additional 75 basis point hike at the Fed’s December meeting, which would fulfill the desires of the hawkish camp. But nothing is guaranteed, with Fed Chair Jerome Powell emphasizing policy will be determined meeting-by-meeting based on the dataflow.

Concerns Over Slowing Growth, Jobs

According to the minutes, officials in favor of maintaining an aggressive policy stance cited inflation remaining well above the Fed’s 2% goal. The labor market also remains extremely tight, with 1.7 job openings for every unemployed person in August.

On the flip side, officials hesitant about more hikes mentioned that monetary policy already appears restrictive thanks to higher borrowing costs and diminished liquidity in markets. Some also voiced concerns over economic growth slowing more abruptly than anticipated along with rising joblessness.

The consumer price index rose 8.3% in August compared to a year ago, only slightly lower than July’s 40-year peak of 8.5%. However, the Fed pays close attention to the services and wage growth components which indicate whether inflation will be persistent.

Data Dependency is the Mantra

The minutes emphasized Fed officials have coalesced around being nimble and reacting to the data rather than sticking to a predefined rate hike plan. Members concurred they can “proceed carefully” and adjust policy moves depending on how inflation metrics evolve.

Markets and economists will closely monitor upcoming October and November inflation reports, including wage growth and inflation expectations, to determine if Fed policy is gaining traction. Moderating housing costs will be a key tell.

Officials also agreed rates should remain restrictive “for some time” until clear evidence emerges that inflation is on a sustainable path back to the 2% target. Markets are pricing in rate cuts in late 2023, but the Fed wants to avoid a premature policy reversal.

While Americans continue opening their wallets, officials observed many households now show signs of financial strain. Further Fed tightening could jeopardize growth and jobs, arguments made by dovish members.

All About Inflation

At the end of the day, the Fed’s policy decisions will come down to the inflation data. If price pressures continue slowly cooling, the case for further large hikes diminishes given the policy lags.

But if inflation remains sticky and elevated, particularly in the services sector or wage growth, hawks will maintain the pressure to keep raising rates aggressively. This uncertainty means volatility is likely in store for investors.

For now, the Fed is split between officials who want to maintain an aggressive tightening pace and those worried about going too far. With risks rising on both sides, Chairman Powell has his work cut out for him in charting the appropriate policy course.