Surprise, Surprise: Jobs Surged

by Liz Ann Sonders and Kevin Gordon, Charles Schwab & Company Ltd.

After “whisper” estimates for the December jobs report, out last Friday, had plunged well into negative territory, payrolls instead jumped by 467k—well above the official consensus of only 125k, and close to twice the highest Bloomberg estimate. Whisper numbers began to sink upon the release, earlier last week, of a very weak/negative ADP payrolls report; as well as assumptions made about the impact of the omicron COVID variant. In fact, the spread between ADP’s -301k and the Bureau of Labor Statistics’ (BLS) +467k was the third-widest in history.

Record 2021 follows record 2020

Not only were December’s payrolls strong, revisions were sharply higher as well—the prior two months were revised up by a massive 709k. This is the time of year when the BLS also does its longer-term “benchmark revisions.” Based on those, nonfarm payrolls averaged 555k per month in 2021—the highest in history. The average monthly percent increase was 0.4%, the highest since 1978. Perhaps no surprise, that followed the abysmal 2020, when the average monthly job loss was 774k—also a record, but not in a good way.

The separate household survey, from which the unemployment rate is calculated, was also strong at 1.2 million, as shown below.
One Year Look at Payrolls

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

Omicron hit hours worked, not payrolls

There are a few “rubs” associated with the report; not least being that we are still nearly three million jobs short of pre-pandemic levels, as shown in the first chart below. That said if the 2021 pace of job gains is maintained, the shortfall will be absorbed by the middle of this year. The majority of the shortfall rests with the leisure and hospitality sector; followed by government and education/health services jobs.

Payrolls Getting There

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

Payroll Shortfalls by Sector

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

Another rub is related to omicron. As noted, many of the negative whisper numbers were based on the assumption that the hit from omicron would fall on payrolls; when in fact, it fell on hours worked. As shown below, omicron had an outsized impact on work absences due to illness, child care or home care responsibilities. In fact, at 34.5 hours, it was the shortest workweek since April 2020 (which was the worst month in the pandemic era for payrolls).

Wages Up, Hours Down

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

Wages and LFPR both jumped

Also shown above are average hourly earnings (AHE), which jumped 0.7% month/month, the most since December 2020. In year/year terms, AHE were up 5.7%, driven by an even higher 6.9% surge among production and non-supervisory workers. Here, too, leisure and hospitality stood out, with a 15.0% year/year gain. “Aggregate payrolls,” which combine hours worked, payrolls and AHE, were up 9.6% year/year—about twice the pre-pandemic rate.

The unemployment rate did tick up to 4.0%, from 3.9% the month before, as shown in the first chart below; but the good news is long-term unemployment (more than 27 weeks) continues to sink. In addition, the uptick in the unemployment rate was in conjunction with a nice jump in the labor force participation rate (LFPR), which increased to 62.2% in December. As shown in the second chart below, the LFPR for prime-age (25-54 years) is now 82%—still below the 83% pre-pandemic level, but well up from the 79.9% pandemic trough. Part of the reason for the renewed upward move in the LFPR is that there is presently a wide range of industries hiring—confirmed by a still-strong employment diffusion index.

UR Up, LTUR Down

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

LFPR Picks Up

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2022.

There are myriad ways to measure wage growth; with one of the broadest being unit labor costs (ULCs). These are only reported on a quarterly basis; along with nonfarm labor productivity. We also got the readings on both of these last week, and as shown below, ULCs were quite tame (and much lower than expectations), while productivity was much stronger than expectations. That is a beneficial combination for corporate profit margins.

Labor Costs Down, Productivity Up

Source: Charles Schwab, Bloomberg, as of 12/31/2021.

Great Resignation easing?

As shown below, job openings were flat and voluntary quits dipped in December; some of which could be omicron-related. However, if it’s the beginning of a stabilizing trend, that could start to put a little downward pressure on wage growth—especially if inflation starts to ease, which we expect.

Openings Flat, Quits Down

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2021.

Another set of leading indicators showing both the slowing in economic growth, and employment, came from the monthly ISM Manufacturing Index reported last week. The fall in the headline index (shown in the first chart below) was driven by the production and new orders components; however, the employment component moved up to a 10-month high. Conversely, in the case of the ISM Non-Manufacturing (services) Index, both the headline and employment components weakened noticeably. In the case of the latter, it may be sending a message of some cooling in employment growth to come.

Manufacturing Employment Stronger

Source: Charles Schwab, Bloomberg, as of 1/31/2022.

Services Employment Weaker

Source: Charles Schwab, Bloomberg, as of 1/31/2022.

In sum

Most of the details within the latest jobs statistics show a still-tight labor market; but perhaps slightly less tight given the jump in the LFPR. Broader economic data shows a slowdown in consumption trends. The economic slowdown currently underway is not about hiring trends; it’s about spending trends.

In spite of the economic slowdown—but because of high inflation and the strength in the labor market—it is likely a full-steam-ahead message for the Federal Reserve. In the immediate aftermath of Friday’s report, there was an increase in chatter about the possibility of a 50 basis points move at the March Federal Open Market Committee (FOMC) meeting. In addition, the market now has more than five rate hikes priced in for this year; even though it’s premature to bet on the trajectory of rate hikes. Take the Fed at its word when it says its interest rate (and balance sheet) policy will depend on the progression of the inflation (and growth) data as the year carries on.

Ultimately, the speed at which the Fed will be raising rates will likely have an impact on the equity market. It’s already easy to tie the Fed’s move toward policy normalization to the volatility in the equity market. If history can serve as at least a partial guide, the stock market performed much better when the Fed hike rates slowly in a cycle vs. quickly. Until the question about pace is settled, we expect more of the kind of volatility we’ve seen so far this year.

Another key factor that will determine the behavior of the stock market is whether the economic slowdown is a soft landing or heading in the direction of recession. The former has been met with stock market resilience; the latter tends to bring on bear markets. We don’t have a recession as a base case near-term; but have been saying it’s time to dust off the “checklist” of what to look for. It’s a reminder about the power of the disciplines of diversification (across and within asset classes) and periodic rebalancing.

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