February 2, 2023

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Job growth is expected to moderate in December but not enough to slow Fed rate hikes

The economy is expected to have added 200,000 jobs in December, less than November, but still strong enough to keep the Fed aggressively tightening policy to fight inflation.

Economists polled by Dow Jones also expect the unemployment rate to have remained at 3.7% in December, while average hourly wage growth slowed to 0.4% from 0.6% in November. it was there 263,000 jobs were added in November.

The employment report, due for release Friday at 8:30 a.m. ET, is the last major monthly jobs data before the Fed meets on January 31 and February 1.

The data is important because the Fed has been trying to slow a hot job market in its battle against inflation. The central bank raised interest rates seven times in this tightening cycle, and economists say it could raise another half a percentage point in February, but traders in the futures market are betting on a rise of only a quarter of a point.

“I still think we’re going to get a solid number on Friday. I don’t think things have slowed down much,” said Michael Jabin, chief US economist at Bank of America.

Gaben expects to add 215,000 jobs last month. “This is twice the job growth they want.” The December report may still show some gains from seasonal employment.

the The Fed’s latest economic projections show the unemployment rate rising to 4.6% by the fourth quarter. “Their expectations are that the unemployment rate will rise. We know that the break-even rate is somewhere between 70,000 and 100,000,” Jabin said. “If you need the unemployment rate to go up, you need the jobs to go below 70,000 to 100,000.”

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Gaben expects the monthly number to start turning negative in the first half of the year, and then stay negative for some time.

“Right now, basic economics is where we look for clues as to whether the slowdown has expanded beyond housing and non-residential construction investment,” he said. “The next potential venue should be the commodity side of the economy.”

Jabin said the Fed is willing to weaken the labor market because officials see worse damage to the economy if they allow inflation to remain high. He views construction as one area with potential job losses, as the real estate slowdown ripples across the economy.

He said, “We’ve got a large number of homes under construction… We’re going to be looking for mortgage lenders and landlords… people who work in contract drafting and layoffs. That’s probably where you’ll see layoffs first in construction process”. .

Anita Markowska, chief financial economist at Jefferies, expects to add 175,000 jobs, but is very concerned about continued pressure on wages. She agrees with the consensus that wages grew 0.4% in December, or 5% year-over-year, but says that number could jump to 0.7% month-over-month in January as companies implement the increases.

Economists worry that wage inflation, if it starts to escalate, is a type of inflation that will be difficult to eradicate. The strength in the labor economy has been a surprise to economists for several months. For example, job vacancies were reported in November at nearly 10.5 million, more than expected, when Employment Opportunities and Layoffs Survey Released Wed.

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“I think what the JOLTs data tells us is that there really is a slowdown in hiring. It’s not because labor demand is falling rapidly,” Markowska said. “It’s just that supply constraints are starting to show. You’re seeing the quitting rate pick up again. Employment growth is still strong… We’re likely to face more binding constraints in the labor market, and if that’s the case, We’re going for a further hike in wages.”

An area that has shown an increase in hiring is new businesses, said Diane Swonk, chief economist at KPMG.

“A lot of what we’re seeing is being driven on the demand side, not just by employers, but by new business formation, which they suddenly have to compete with,” she said. “It’s a very different situation than what we’ve seen in the past.”

The Fed has raised interest rates seven times since last March, and the federal funds rate is now 4.25% to 4.5%. Both Gaben and Markowska said that the strength in employment warrants the central bank to raise interest rates by another half percentage point on February 1, and then a quarter point in March. However, many investors expect only a quarter-point rise in February and then another quarter-point after that.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed is trying to encourage investors to expect higher rates for longer. That was evident in December meeting minutesreleased Wed.

“I think they are trying to steer the markets from thinking rates are going to come down quickly this year,” he said. “If you look at the market expectations, the fed funds rate is going to be 5% soon and then back down very quickly at the end of the year. The message in the minutes is that rates are going to be higher for longer. Who knows at the end of the day if they’re going to keep rates that high.” For a long time, but that’s the message they wanted to send.”

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Zandi forecasts that the economy added 225,000 jobs in December.

“The labor market is slowing steadily, but for sure. It’s not enough. I think the Fed would like to see job gains south of 100,000, closer to zero, to move unemployment north and wages moving south. These numbers suggest we ‘and will move quickly in that direction'” “I think we’ll hit 100,000 in the spring and there will be months at zero in the spring or summer.”

Because of its potential impact on the Federal Reserve, the jobs report could move the markets.

“I would look at wages first and foremost. If jobs are available at 250,000 or 300,000, I don’t think the market is overreacting,” said Michael Schumacher, head of macro strategy at Wells Fargo. “If the wages side comes in at 0.5 or 0.6, that’s very annoying. 0.3 is not an event. The market needs 0.2 to move a lot, and then the narrative starts that the Fed is almost done.”