Hurts So Good: Jobs Picture Stays Mixed

January 10, 2023

6 minute read

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

There was something for everyone—even those supportive of an economic soft landing—in December's jobs report, but recessionary signals have not subsided.

The best way to describe December's jobs report might be "two-handed." On the one hand, wage growth continued to slow and labor force participation picked up—in line with what the Federal Reserve wants to see to achieve an economic soft landing. On the other hand, the unemployment rate moved down to 3.5% and the economy added 223k nonfarm payroll jobs according to the Establishment Survey—which still supports the notion of a relatively tight labor market.

Put simply, there was something for everyone in this labor update. Those in the recession camp can point to a decline in hours worked, spike in multiple jobholders, and rolling over in weekly pay growth to bolster their case. Those on the non-recession, soft landing team can cheer for wage growth moving down while the unemployment rate dipped to near its lowest since the 1960s. This arm wrestle—which we'll detail through the collection of charts below—underscores that the labor market continues to send mixed signals.

Green light, red light

Taking stock of the December jobs report, as the chart below shows, nonfarm payroll growth remains relatively strong. The economy added 223k jobs in December, a slower pace relative to prior months, but still strong in absolute terms. Shown via the orange bars, the Household Survey—from which the unemployment rate is calculated—showed a spike in employment by 717k, a massive reversal from the decline in November (and the most since March 2022).

That jump was certainly a surprise to many observers, but it's worth noting that household employment data is historically more volatile than nonfarm payroll data. In addition, although the Establishment Survey shows that 2.9 million payrolls were added over the past nine months, the Household Survey has shown an increase of only 920k. As a reminder, the Household Survey tends to lead payrolls at turning points in the economic cycle; so, if December's gain ends up being an outlier, the slowdown signal from household employment will remain intact. Also, for what it's worth, there were no full-time jobs added in December.

Not in this household

Over the past nine months, nonfarm payrolls have increased by 2.9 million, while the household survey shows a gain of only 920k.

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

At the industry level, breadth was strong for both the goods-producing and services-providing segments of the economy. As shown in the chart below, hiring was robust across industries, albeit with notable declines in information and professional & business services. It's also worth noting that temporary help services jobs—not broken out below, but a key leading indicator—fell for the fifth straight month.

Still hiring

Hiring in December was strong across numerous industries, with only a few notable declines in those such as professional & business services and information.

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

Where art thou, Phillips curve?

At its simplest, the soft landing argument largely rests on the Fed's ability to slow economic activity and wage growth without causing a recessionary-like spike in the unemployment rate and/or large-scale job losses. Count us in the camp skeptical of it playing out this way. Cases in point: the most recent release of monthly data from the National Federation of Independent Business (NFIB) shows fewer small companies are planning to hire; while the University of Michigan Consumer Sentiment survey shows expectations of rising unemployment over the next year. That said, at least for December, those betting on a soft landing saw their argument strengthened.

As shown in the chart below, average hourly earnings (AHE), for production and nonsupervisory workers, grew by 5% year-over-year in December. While that is still fast relative to history, it's down from the recent peak of 6.7% in March 2022. Perhaps more impressively, that decline has occurred in the context of an unemployment rate that has barely budged. In fact, from March to December, it moved down from 3.6% to 3.5%.

Of note though, given that AHE is an average, not a median, it can get skewed by "mix shift." Notably, the 2020 spike in AHE to near-8% was largely driven by lower-wage workers losing their jobs in greater proportion during the pandemic lockdown phase—somewhat artificially boosting the average wage. As those workers rejoined payrolls into 2021, that biased the average wage significantly lower (to sub-2%). What may be happening now is that higher-wage workers are starting to lose jobs—especially within the tech sector—which could explain some of the rolling over in AHE.

Wages down, unemployment not up

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

*Average hourly earnings for production and nonsupervisory workers.

The dynamic of softening wage growth and a largely unchanged unemployment rate calls into question the viability of the Phillips Curve, which argues that lower unemployment is consistent with faster wage growth (and vice-versa). In fairness, it's likely too early for the Fed to declare victory with wages growing at 5%, but at the same time, the current downtrend in wage growth is historically consistent with a rising unemployment rate. The question moving forward is whether the Fed stays married to the disciplines of the Phillips Curve. If not, it might strengthen the case that wages can fall without a commensurate spike in unemployment.

Yet, there are still some indicators likely preventing the Fed from playing down the prospect of sticky wage growth. As shown in the chart below, job leavers still make up a good chunk of the number of unemployed individuals. This underscores the degree of confidence individuals continue to have in being able to leave their job (and find another one). As long as it stays elevated, it might keep some upward pressure on wages.

Still easy to leave

Job leavers still make up a good chunk of the number of unemployed individuals, which underscores the degree of confidence individuals have in being able to leave their job (and find another one).

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

Fed alert

There are myriad signals in support of a soft landing, but there are just as many that point to a recession. The rolling over in job openings has indeed been consistent with the Fed's goal in bringing down labor demand. Total openings have fallen from a peak of 11.9 million to 10.5 million as of the latest data in November 2022. In level terms, openings are incredibly high relative to history, but rate of change is very important. As shown in the chart below, job openings have fallen by more than 750k over the past six months, a magnitude only seen in the past three recessions.

Less open for business

Job openings have fallen by more than 750k over the past six months, a magnitude only seen in the past three recessions.

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 11/30/2022.

Confirmation of slowing demand on the part of companies is also showing up in the high-frequency jobless claims data. As shown in the chart below, continuing jobless claims—which track how many individuals are receiving unemployment benefits—have risen by nearly 30% from their recent trough. That is well above the average increase from a pre-recession trough to the start of a recession, as shown in the table within the chart.

Continuing to worsen

Continuing jobless claims—which track individuals receiving unemployment benefits—have risen by nearly 30% from their recent trough.

Source: Charles Schwab, Bloomberg, as of 12/23/2022. Y-axis truncated for visual purposes.

Another worrisome signal has been the pickup in layoff announcements. Per Challenger, Gray, and Christmas, company layoff announcements surged by 129% year-over-year in December, a drop from the 417% jump in November—but still one of the largest increases since the pandemic started. The caveat here is that layoffs have mostly been confined to the beleaguered tech sector, so breadth is worth watching when it comes to this metric.

Deeper cuts

Per Challenger, Gray, and Christmas, company layoff announcements surged by 129% year-over-year in December, a drop from the 417% jump in November, but still one of the largest increases since the pandemic started.

Source: Charles Schwab, Bloomberg, as of 12/31/2022.

Tying this back in with December's jobs report, it's worth looking—especially at this phase of the economic cycle—at the cracks that continue to widen underneath what is thought of as a strong labor foundation. One of the glaring blemishes we've been highlighting for a while is the significant cuts to hours worked.

As shown below, average weekly hours worked have fallen to their lowest since April 2020, bringing down considerably the growth rate in weekly pay. While that bodes well for softer spending and—in theory—easing inflation, there may be a point at which this puts more downward pressure on the broader economy, not least because consumers have markedly less spending power. Consider the fact that when average weekly pay growth was last at its current rate (May 2021), the personal savings rate was 10.3% and the consumer price index (CPI, year-over-year), was 5%. Today, those figures are 2.4% and 7.1%, respectively.

Work less, make less

Average weekly hours worked have fallen to their lowest since April 2020, which has brought the growth rate in weekly pay down considerably.

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 12/31/2022.

In sum

December's jobs report was chock-full of competing data when it comes to the debate over a recession vs. soft landing. Whatever one's bias was heading into the report, it was likely confirmed by whichever metric made the most sense for each respective argument. As we start off the new year, we think labor market data will start to take a larger share of the spotlight from inflation data. Now that price growth is definitively easing, what will become increasingly important is the Fed's reaction function to an unemployment rate that is stubbornly low in the face of receding wage growth—especially as recessionary signals from the labor market continue to pile up.