by Liz Ann Sonders, Chief Investment Strategist, & Kevin Gordon, Charles Schwab & Company Ltd.
Hi everyone, I am Liz Ann Sonders and this is the January Market Snapshot. As always thank you so much for tuning in and happy new year to you all. In this month's video, I'll share thoughts on the latest jobs report and more broadly, the health of the labor market. In terms of the December jobs report, which was released on Friday, January 5th, the headlines were pretty shiny, it’s just that the details were duller.
[High/Low Chart for Household survey dives for Establishment survey (nonfarm payrolls) is displayed]
So you had non-farm payrolls announced as being up 216,000, in December, which was well north of the 170,000 consensus estimate. But there was some weather-related flattering with 87,000 folks not at work due to weather versus a December average of 101,000 during the prior three years. Another rub was an overly optimistic business birth death assumption, which added about 110,000 to payrolls.
[High/Low Chart for Household survey is displayed]
Yet another rub was the massive 683,000 decline in household employment. As a reminder, the Bureau of Labor Statistics, or BLS, conducts two surveys each month: the Establishment Survey, from which payrolls are calculated, and the Household Survey, from which the unemployment rate is calculated. Also picked up in the Household Survey was that multiple job holders have jumped to 5.3% as a share of employed people. And that's up from 4.8% in mid 2023. Finally, in the household survey, the number of full-time workers fell by the most since April 2020, while the only gains were actually in part-time employment.
[High/Low Chart for Sea of downward revisions for Monthly revision to nonfarm payrolls is displayed]
Now, along with the 216,000 payrolls announced for December, there were 71,000 worth of downward revisions to the prior two months payrolls. In fact, through November, since we have yet to get any December revisions, all but one month had downward payroll revisions.
[High/Low Chart for Initial vs. revised for Initial release of monthly change to nonfarm payrolls is displayed]
And this subject of revision brings up an important message about comparing current headline labor market data to historical information, particularly when assessing recession risk, which is obviously a hot topic. If you were to pull up a long-term chart of payrolls, the data shown now would reflect all of the revisions that came subsequent to those initial releases.
It's part of the reason why you should have some skepticism around proclamations like there's no way a recession is possible with still strong payrolls growth. Now, as an example of this, this set of bars represents initial releases in the period surrounding the onset of the global financial crisis-related recession, which started in December of 2007.
[High/Low Chart for Final release of monthly change to nonfarm payrolls is displayed]
The orange bars here represent the actual readings, once all subsequent revisions were released. As a reminder, the BLS does revisions for the prior two months, each time they release a monthly jobs report, but they also do annual benchmark revisions. And as shown here, prior to the start of the recession in December of 2007, seven out of the eight prior months, initial readings were ultimately revised lower.
In other words, the perceived story at the time was a fairly healthy job growth, while the actual story was of a deceleration into recession. The initial story was an economy that had added 1 million jobs between April 2007 and December 2008 with the real, meaning post-revision story, was an economy that had shed more than 2 million jobs over that period. And as you can also see, once the recession was under way, again, it started December of ‘07, the downward revisions really kicked in.
[High/Low Chart for Participation dips for Labor force participation rate is displayed]
Now, as I mentioned earlier, the household survey, which is a survey of people, not of companies, is used to calculate the unemployment rate, along with the labor force participation rate. There was a meaningful decline in overall participation, and it represented in people terms, a decline of 676,000, a reduction in the size of the labor force.
[High/Low Chart for Prime age: 25-54 years old is displayed]
Now that decline also included a fall in prime-age participation as well.
[High/Low Chart for Unemployment flat for U-3 unemployment rate is displayed]
Now the unemployment rate held steady at 3.7% in December but the math behind that flat reading was the 676,000 decline in the size of the labor force being nearly as large. as the aforementioned, 683,000 decline in household employment.
Another rub within the unemployment statistics was that longer-term unemployment, meaning people unemployed for more than 27 weeks, that moved up to 19.7%, which is up from 17 and a half percent just last February. In addition, there's something called the underemployment rate, which is the percent of employed people working part-time but would prefer full-time. That rose to 7.1%, which is up from 6.6% just last April. Another important reminder about the unemployment rate is that it's a highly lagging indicator. As we often explain, a rising slash high unemployment rate doesn't bring on recessions. Recessions come and they eventually cause the unemployment rate to rise and the same relationship holds when exiting a recession into a recovery, as you can see with these recession bars.
[High/Low Chart for Wages up, hours down for Average hourly earnings is displayed]
Now, one final rub in the December jobs report release was an uptick in average hourly earnings. Now, I'm not saying higher wages for workers is a bad thing. It's not. What it does is cloud the picture for the Federal Reserve given the market is currently expecting rate cuts to start within a few months. And higher wage growth all else equal is somewhat inconsistent with the Fed's goal of inflation coming down to its 2% target.
[High/Low Chart for Average weekly hours worked is displayed]
In addition, and keeping with the weakening economy view, was the accompanying decline in average weekly hours worked. So the trend of stronger than expected payrolls growth alongside weaker than expected hours worked suggests the labor market is still relatively tight, but that economic conditions warrant less demand for workers hours.
[List of Takeaways is displayed]
So let me close with some takeaways. The December jobs report adds some uncertainty to the Fed's plans. Amid some ongoing hiring difficulties, but decelerating job growth, frankly, trying to assess a clear labor market narrative continues to be a challenge. The report may have added a few feet to the degree by which the market's expectations have gotten over its skis regarding rate cuts starting soon. Now, we do expect the Fed to begin cutting at some point this year, perhaps not as soon as the market is expecting. So that's it for this month. Thanks as always for tuning in.
[Disclosures and Definitions are displayed]
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