Although the Federal Reserve is fighting inflation, rising borrowing costs may have kept the U.S. economy’s rate of job and pay growth strong in December. However, by the middle of the year, this momentum may have dramatically slowed.
In last month’s carefully watched employment report from the Labor Department on Friday, it was also anticipated that the unemployment rate would remain constant at 3.7%. Since the Fed started its quickest interest rate hike since the 1980s in March of last year, the labour market has remained robust.
Airlines, hotels, restaurants, and bars are in desperate need of staff as the leisure and hospitality sectors continue to recover from the pandemic, despite job cuts in rate-sensitive sectors like housing and finance and technology companies like Twitter, Amazon (NASDAQ:AMZN), and Facebook (NASDAQ:META) parent Meta.
Consumer spending has been sustained by the labour market’s durability, which has supported the economy. However, this could lead the Fed to raise its target interest rate above the 5.1% high it predicted last month and to hold it there for some time.
According to Sung Won Sohn, a finance and economics professor at the University of South Korea, all signs point to a strong labour market.
Loyola Marymount University in Los Angeles “Leisure and hospitality employers are not able to get anybody even after wages have been going up.” That pattern has and will continue for a while, so that’s where the rubber hits the road.
The survey of business establishments is likely to show that nonfarm payrolls increased by 200,000 jobs last month after rising by 263,000 in November, according to a Reuters poll of economists. That would be the smallest gain in two years.
However, job growth would far exceed the pace needed to keep up with growth in the working-age population, comfortably in the 150,000–300,000 range that economists associate with tight labour markets.
Estimates ranged from 130,000 to 350,000, which was what TD Securities had projected.
Employers retained employees in December, according to data from payroll scheduling and tracking business Homebase, which indicated a smaller-than-normal decline in not seasonally adjusted (NSA) terms.
SUMMER BOOST
“This suggests that the seasonal element, which should be correcting over a plus 200,000 NSA fall, would be contributing over a greater than projected figure,” says Oscar Munoz, macro strategist at TD Securities.Over the past five Decembers, the seasonal adjustment has, on average, added 430,000 jobs.
Government payrolls are reportedly suffering from a 36,000-teacher strike that is still going on in California. The government will update the seasonally adjusted data from the household survey for the previous five years, which are the source of the unemployment rate.
Some analysts argue that overall job growth was overestimated because household employment fell in October and November. The difference between the two measures has caught the attention of some Fed officials as well.
However, the household survey is notoriously unstable, and the majority of economists anticipate that household employment will change in favour of nonfarm payrolls.
Veronica Clark, an economist at Citigroup (NYSE: C) in New York, stated that corrections “have tended to emerge through household employment, correcting towards now-stronger payrolls,” whenever trends in household employment have varied from payroll employment. “We wouldn’t be surprised” if household employment increased even more in December or the following months.
The change to the household data appears to have no effect on the unemployment rate. After rising by 0.6% in November, it is anticipated that average hourly earnings will have increased by 0.4%. By doing so, the annual pay growth would be reduced from 5.1% in November to 5.0%.
Since most workers receive cost of living increases nationwide and some states have raised their minimum wages, strong wage growth is anticipated to continue in January. At the end of November, there were 10.458 million job openings, or 1.74 jobs for every unemployed individual.
But by the middle of the year, the employment growth trend may have drastically slowed. The Federal Reserve last year increased its policy rate by 425 basis points, bringing it to a range of 4.25% to 4.50%, the highest level since late 2007. By the end of 2023, it anticipated increases in borrowing costs of at least another 75 basis points.
According to a new Conference Board survey, chief executive officer confidence is at its lowest point since the Great Recession.
According to James Knightley, chief international economist at ING in New York, “if they think demand is falling and revenues are going to decline, they’re probably going to feel pressure to cut costs to retain profitability.” That does indicate that the rate of employment growth is probably going to slow down rather significantly throughout this year, and we might even start to see some job losses in the middle of the year.
