The economy is expected to add 200,000 jobs in December, less than November, but still strong enough to maintain the Federal Reserve’s aggressive policy tightening to fight inflation.
Economists surveyed by Dow Jones also expected the unemployment rate to remain at 3.7% in December, while average hourly wage growth fell to 0.4% from 0.6% in November. There were 263,000 jobs added in November.
The employment report is scheduled to be released on Friday at 8:30 a.m. ET, and is the last major monthly jobs data before the Fed meets on January 31 and February 1.
The data is important as the Fed has been trying to slow down the hot labor market in its fight against inflation. The central bank has raised interest rates seven times in this tightening cycle, and savings said it could rise by another half a percentage point in February, but traders in the futures market are betting on only a quarter-point increase.
“I still think we are in solid numbers there. I don’t think it has slowed down all that much,” said Michael Gapen, chief US economist at Bank of America.
Gapen expects 215,000 jobs to be added last month. “The second is the expected job growth.” The December report may still show some benefits from seasonal hiring.
The latest economic forecast from the Fed shows unemployment rose to 4.6% in the fourth quarter. “The forecast has the unemployment rate rising. We know the breakeven rate is between 70,000 and 100,000,” said Gapen. “If you need the unemployment rate to rise, you need jobs to fall below 70,000 to 100,000.”
Gapen expects monthly numbers to turn negative in the first half of the year, then remain negative for some time.
“Now the underlying economy is where we’re looking for evidence to suggest whether the slowdown has broadened beyond housing and nonresidential investment construction,” he said. “The next place should be the goods side of the economy.”
The Fed is willing to weaken the labor market because officials see worse damage to the economy if they allow inflation to remain high, Gapen said. He sees construction as one area that could provide jobs, as the real estate slump cuts across the economy.
“We have many houses under construction. … We will look for mortgage service lenders and brokers … people who are framers and laying foundations. That’s where you will see the first layoffs in construction,” he said.
Aneta Markowska, chief financial economist at Jefferies, expects 175,000 jobs to be added, but she is most concerned about continued wage pressures. He agreed with the consensus that wages rose in December by 0.4%, or 5% annually, but said the number could jump to 0.7% month-on-month in January, as companies implement increases.
Economists worry that wage inflation, once it begins to spiral, is a more difficult type of inflation to eliminate. The strength in the labor economy has surprised economists for months. Job openings in November, for example, were reported at nearly 10.5 million, more than expected, when the Job Openings and Turnover Survey released Wednesday.
“I think what the JOLTs data tells us is that there is actually a slowdown in hiring. It is not because the demand for workers declines quickly,” said Markowska. “It’s just supply constraints starting to bite. You see the rate of quits go up again. Hire growth is still hindering … , we get higher salaries.”
Diane Swonk, chief economist at KPMG, said that the region has shown an increase in hiring new companies.
“A lot of what we’re seeing is driven on the demand side, not just by employers, but by the formation of new businesses, which suddenly have to compete,” he said. “It’s a very different situation than we’ve seen in the past.”
The Fed has raised interest rates seven times since last March, and the fed funds rate is currently at 4.25% to 4.5%. Both Gapen and Markowska said the strength in labor ensures the central bank raises rates by another half a percentage point on February 1, and then a quarter point in March. Many investors, however, only expect a quarterly increase in February and then another quarter after that.
Mark Zandi, chief economist at Moody’s Analytics, said the Fed is trying to encourage investors to expect higher rates. This appears in the minutes of the December meeting, released Wednesday.
“I think they’re trying to steer the market away from thinking that rates are going to come down quickly this year,” he said. “If you look at market expectations, the fed funds rate came up to 5% shortly and then came down again very quickly at the end of the year. The message at the minute is that rates will go higher again. Who knows at the end of the day if they will keep rates high, but the message you want to send.”
Zandi expects the economy to add 225,000 jobs in December.
“The labor market is slowing down, but that’s for sure. Not enough. The Fed, I think, would love to see job gains south of 100,000, closer to zero, so that unemployment moves north and wages move south. The numbers suggest We’ll quickly move in that direction,” he said. “I think it will be at 100,000 in the spring and there will be zero months in the spring or summer.”
Because of the potential impact on the Fed, the jobs report could move the market.
“I will look at wages first and foremost. If the job comes in at 250,000 or 300,000, I don’t think the market reacts too much,” said Michael Schumacher, head of macro strategy at Wells Fargo. “If the wage side comes to 0.5, or 0.6, it is quite disruptive. 0.3 is a nonevent. The market needs 0.2 to move a lot, and then the narrative kicks in the Fed is almost over.