The U.S. economic outlook is complicated.
Friday’s two key data points were no exception.
The December jobs report showed more jobs were created last month than expected, while the unemployment rate fell to its lowest level since 1969.
Some 90 minutes after this report, data on service sector activity from the Institute for Supply Management suggested recession is nigh.
The release of conflicting data on the state of the economy feels like a daily event for investors. We’re not optimistic the coming weeks and months will change this state of play.
At the heart of this divide are expectations about the economy diverging from data about the reality in the economy.
And what’s been happening is this: There were 4.5 million new jobs created in the U.S. economy last year.
To our minds, this is the most important economic figure of the year.
Going back to World War II, only 2021 has seen a better year for job creation. And the more people with gainful employment, the better the prospects for the economy.
But as Yahoo Finance’s Alexandra Semenova reported earlier this week, there are plenty of concerning data points even in this record-setting labor market.
The tech industry, most notably, continues to greet investors with a flurry of announcements about planned staff cuts: 18,000 workers at Amazon (AMZN), 10% of Salesforce’s (CRM) staff, and 13% of Meta’s (META) team, to name a few.
Still, aggregate reads on the labor market could not paint a more different picture. Every month in 2022 witnessed headline job gains. And in each of the last nine months, job gains have been higher than forecast by economists, according to data from Bespoke Investment Group.
In other words, Wall Street has been too pessimistic about the labor market for most of the last year. And the headlines aren’t exactly painting an optimistic picture, either.
But compared to February 2020, the last month before the economy was hit by the pandemic-induced recession, there are 1.2 million more people with jobs today. After completing its comeback from the pandemic in the summer, the labor market continues to improve past those pre-COVID highs.
Retorts that these data are backward-looking are chronologically accurate, but they hardly build an airtight case of an imminent recession.
Still, investors and economists remain steadfast that a downturn is in the offing.
For one thing, job gains continue each month, but the rate of increase is slowing. And investors are almost always more interested in the second derivative — the rate of change of the rate of change — in any data point, economic or otherwise.
“The December jobs report brought further signs that the labor market is beginning to soften, but remains incredibly strong,” wrote Wells Fargo economists Sara House and Michael Pugliese in a note to clients on Friday. “Beyond the downshift in hiring, there were additional signs in the establishment survey that labor demand is gradually cooling.”
Wells Fargo noted that a decline in temporary help employment and a drop in average weekly hours worked last month offer evidence the labor market is heading toward a “material slowdown” this year.
Wage gains are also moderating, with average hourly earnings rising 4.6% over the prior year in December, less than the 4.8% seen in November.
That is a good sign for the Federal Reserve’s worries about a wage-price spiral but a sign competition for workers could be moderating.
And there’s still the problem of elevated inflation — though this, too, is slowing down — as well as a downturn in the housing market.
These tensions between where the economy is and where the economy is going are, ultimately, just features of an economic cycle. Conditions in markets and the economy are never static — things are always getting better or getting worse.
To say the outlook for the economy has deteriorated in recent months is hardly controversial. We just outlined all the ways this is true.
Even President Joe Biden acknowledged this dynamic, saying in a statement after Friday’s jobs report: “This moderation in job growth is appropriate, and we should expect it to continue in the months ahead, even as we maintain resilience in our labor market recovery.”
But a step down in growth need not be a harbinger of imminent decline.
“We believe that the moderation in employment conditions will continue, as parts of [Friday’s] report show, but we think there is still a stickiness to the labor demand in services, which will persist for a while,” wrote Rick Rieder, BlackRock’s CEO of global fixed income and head of the firm’s global allocation investment team.
Rieder added hiring in the health care and leisure & hospitality industries suggests “an economy displaying still tight labor market conditions and one that is not yet fully recovered from the COVID-driven reductions in workforce in parts of the service sector and the continued demand for people in labor intensive industries.”
A bit of a complicated sentiment, to be sure, but one we think squares with the view that a clear message continues to come through about the U.S. economy today: The labor market remains strong.
And until this cracks, recession fears will remain just that.
This article was featured in a Saturday edition of the Morning Brief on January 7, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
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