The US economy added just 199,000 jobs last month, the government’s hotly anticipated December payrolls report showed.
Real-time expectations for the headline print were inflated by a blockbuster read on private sector hiring from ADP earlier in the week. The whisper number for Friday’s report was in the neighborhood of 500,000. The range of estimates from nearly six-dozen economists was 150,000 to 850,000. So, the actual print didn’t quite match the lowest guess, but it was close.
December’s headline miss (figure below) was the second straight wild downside surprise. Call it a dubious encore to November’s disappointing top line print, which, you’ll recall, belied all manner of under-the-hood nuance, some of which was of the silver lining variety.
On the bright side, revisions added 102,000 to October’s print and 39,000 to November’s optically poor headline.
Leisure and hospitality rebounded from a woeful performance the prior month, but the 53,000 jobs the sector added in December still counted as a lackluster showing.
Even after 2.6 million jobs added in 2021, the sector is more than 7% short of pre-pandemic levels (figure below).
Food services and drinking places added 43,000 positions, but it’s an open question whether December’s reported gains are an accurate reflection of services sector hiring considering the worst of the Omicron wave didn’t hit until very late in the month.
“Most of the virus-related slowdown in dining activity occurred after the December survey week,” Goldman said, adding that “big data labor market indicators were generally solid in the month, and the number of year-end layoffs was well below normal.”
Recall that November’s report showed leisure and hospitality added just 23,000 jobs, the worst showing since January 2021.
Manufacturing added 26,000 jobs in December. That was a disappointment, versus consensus (36,000) yes, but also versus an extremely solid read on the goods producing sector from ADP’s report and ISM manufacturing’s employment index, which moved further into expansion territory last month.
The unemployment rate, which dropped sharply in the November report, fell again, hitting a new pandemic-era low of 3.9%. The labor market is now just 0.4% from pre-pandemic levels. The participation rate was steady. The Fed has made it clear that monetary policy won’t wait for a full recovery there, given the likelihood that early retirements and other pandemic effects are poised to leave participation below the demographic trend, a structural shift that might take years to reverse.
Average hourly earnings rose 4.7% YoY and 0.6% MoM in December. Both of those prints were hotter than expected, but don’t lose perspective. “Ostensibly these are impressive figures, however with CPI during the same period projected at 7.1%, in real terms the average wage gains are failing to keep pace with inflation,” BMO’s Ian Lyngen and Ben Jeffery remarked.
I’d be remiss not to note that the dramatic events of February 5, 2018, were presaged by a hotter-than-expected read on wage growth the previous Friday. By appearances anyway, Fed policy in 2022 is poised to look quite a bit like it did in 2018, albeit starting from a much more accommodative stance.
With the FOMC now plainly intent on rapid tightening to reestablish the Committee’s inflation-fighting bonafides, one risk for markets is that the incoming data increases policymakers’ sense of urgency. Liftoff is almost fully priced for March and comments from Jim Bullard on Thursday served to solidify those expectations. “My own view is we could go ahead with balance sheet runoff shortly after lifting off the policy rate,” Bullard told reporters. “I think March would be a possibility” for liftoff, he added.
“As the Fed demonstrated at the December 15 meeting via the tapering acceleration, a [below-consensus] payrolls print isn’t worrying for monetary policymakers, especially not in an environment with pandemic-inspired inflation as the primary concern,” Lyngen and Jeffery wrote. “The broader Fed tightening narrative will be extremely difficult to derail at this stage.”
Balance sheet runoff is now the topic du jour, and Treasurys came into payrolls riding their worst start to a calendar year in history. The Bloomberg US Treasury Index was down 1.4% in just four days, on track for the worst opening week decline in data going back almost 50 years.
If the Fed sticks to Bullard’s tightening schedule in the face of the slowdown in hiring, it makes it clear that they have added a new policy mandate: suppress wage gains.
Which then clarifies which inflation the Fed is most worried about. Not dollar inflation or securities inflation or goods inflation but labor inflation.
In fairness, perhaps it is also a “back door” effort to cool asset and housing prices?
The Fed has always keep a publicly hands-off attitude towards asset bubbles. They clearly regard rising housing prices as a third rail they cannot explicitly touch. Even to the point of putting the greater economy at risk through blanket rate increases rather than simply tightening mortgage availability rules. Like every central bank in the developed world does.
I guess they feel it is safer to be seen as suppressing wages ….
The Fed putting the brakes on is an indication that fiscal and monetary policy worked well in 2020-21 post pandemic. It was better they went overboard- and further fiscal stimulus aimed at the bottom 70% would be better still. I have arguments with my UST bond hedger friend about the balance sheet. I think the flow matters more, he thinks the stock of UST bonds at the Fed matters and they should reduce UST bond holdings. I think they would be far better off getting out of the balance sheet games and just raise rates as needed. Rates are a lot easier to adjust. They can always reinvest MBS into UST bonds of 7 years or less.