QQQ - Another Soft Landing Jobs Report

2023-12-08 11:00:13 ET

Summary

• Bulls see a softening labor market, reinforcing the disinflationary trend and the potential for Fed to reduce interest rates next year.
• Bears predict a rapid increase in unemployment claims, stalling job creation, and a recession next year.
• Jobs report shows a slight increase in jobs, a steady unemployment rate, and maintained wage growth, supporting a soft landing for the economy.

If you told me what today's jobs numbers would be yesterday, I doubt I would have been able to tell you how the market would react. There is a tug-of-war between bulls and bears on how to interpret all the incoming high-frequency economic data, and the November jobs report is no different. Bulls see a gradual softening in the labor market, as job openings fall, continuing unemployment claims increase, wage pressures ease, and the economy creates just enough jobs to absorb population growth. That should reinforce the disinflationary trend and allow the Fed to start reducing short-term interest rates during the first quarter of next year, as the economy makes a soft landing.

Bears see a more rapid increase in unemployment claims coming, with job creation stalling and the unemployment rate rising meaningfully next year, as tighter financial conditions strangle the expansion. This will have an adverse impact on consumer spending, forcing the Fed to cut rates in what they expect will be a failed attempt to stave off a recession next year.

One month's number is not going to change the narrative for either side, as both are likely to pull data from the report to support their respective views. I have firmly been in the bull camp all year long, but I am more focused on the data in today's report that might undermine my outlook, if there is any, rather than information reinforcing the trends in place.

According to the Bureau of Labor Statistics, the economy added 199,000 jobs last month, which was slightly above the consensus expectation for 183,000. Additionally, the prior two months were revised lower by 35,000. It is important to note that the BLS estimated there could be as many as 40,000 additional jobs in today's figure, resulting from the end of strikes by autoworkers and Hollywood actors. That is consistent with the 30,000 that were created in the manufacturing sector last month, as well as the 17,000 added in the motion picture and sound recording industries. If we account for those one-time additions, the jobs number was lower than expected. The trend continues to be a very gradual decline in monthly jobs creation.

The unemployment rate edged down from 3.8% to 3.7%, while the labor force participation rate held steady at 62.8%. Again, this is not too hot nor too cold. Wage growth is more important than job growth when it comes to the inflationary impact on the economy. Average hourly earnings rose 0.3% last month, which was in line with expectations, while the annualized increase held steady at 4% after the prior month was revised lower. This maintains the deceleration that the Fed wants to see. Most importantly, this rate is still above the rate of inflation, which means workers are still maintaining real wage growth. That should help offset the decline in excess savings and sustain real growth in consumer spending.

Other indicators for the labor market also reinforce the disinflationary trend, but still reflect enough strength to prolong the expansion. This week's JOLTS report showed a steep decline in job openings of approximately 617,000 to a 28-month low of 8.73 million, but that number is still above pre-pandemic levels.

The quit rate, which is the percentage of workers who voluntarily leave a job, is back to pre-pandemic levels of 2.3%. This suggests workers are less inclined to quit, which means they are not as confident that they can find another job. That further eases the upward pressure on wages, which is inflationary. Again, it appears we are right on track for a soft landing for the economy.

Weekly unemployment claims remain at historically low levels and consistent with the two-year average of 220,000, which is a timelier indicator of labor market health.

Continuing claims have risen, although fell sharply last week from the prior two-month high, but this is not an alarming number. It means that those who are losing their jobs are having a harder time securing new employment, which is another indication that the labor market is cooling, which is necessary to see the disinflationary trend continue.

While this set of numbers is exactly what the Fed wants to see to cool the economy and bring the rate of inflation down to 2% without ending the expansion, I think it is largely priced into the bond market. The stock market has also factored in much of the good news. This is why I asserted yesterday that the bull run in long-term bonds has probably run its course with 10-year Treasury yields (US10Y) falling from 5% to just over 4% over the past six weeks.

A further decline in long-term yields may no longer be good news, as it could suggest more severe labor market weakness that slows the rate of economic growth well below trend. This is why soft landings are so difficult to execute. That remains my base case, but I think we need to see stability moving forward rather than weaker numbers from here.

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