Job Data Show U.S. Economy Is Undeniably Hot, But Markets Got Bad News

Whoa! I didn't expect that. As a matter of fact, if you look at my projections from Friday morning's Market Recon, I was a little less optimistic on December employment than was the consensus view, and consensus view was a lot less optimistic than what hit the tape. 

Being that I root for the United States of America, I have to hope these numbers are close to accurate. Given recent BLS history, that's a big ask, and Wednesday's ADP report adds credence to this skepticism. What gives the report some credibility, in my opinion, is how overwhelmingly positive and broadly positive it is.

You all know that one of my talents or character flaws, depending on your point of view, is my ability to find the warts in almost any BLS monthly labor market release. Really, gang, there is not a whole lot of ugly inside the results of the two monthly surveys. 

Wage growth continued to slow. That's it. That's all the ugly I can find. Now, if we go out a bit and think about it, this red-hot employment report does put FOMC rate hikes back on the table and, if left unrevised, likely puts an end to any thought of any rate cut any time soon. Major kudos to Fed Gov. Michelle Bowman who said as much on Thursday that monetary policy was likely not restrictive enough. I did tell you all that she should be Fed Chair. Either her or Judy Shelton, but those are my preferences.

The Establishment Survey

The headline print for not just this survey, but for the whole report is the number for seasonally adjusted non-farm payrolls. This number, for December, hit the tape at job creation of 256,000, easily beating the 160,000 that Wall Street had in mind. This was after absorbing very mild and perfectly acceptable revisions to both October and November. Making the report even stronger, and in contrast to what the ADP reported, the strength in this number came from the private sector (223,000). The largest hiring groups were in wholesale and retail trade. Hiring in manufacturing continued to recede.

As mentioned above, wage growth was less than strong. While the average workweek for full-time employees held firm at 34.3 hours per week, which is toward the low end of the range, hourly wages increased by 0.3% month over month, down from 0.4% for November and increased by 3.9% year over year, down from an even 4% in November. This is the only item I see here that is surprisingly negative.

The Household Survey

Now, this is interesting. Usually, at least this year and last, when the Establishment Survey showed huge job growth, the Household Survey showed either weak job growth or even outright job destruction. Not true this time. For December, the Household Survey shows 478,000 more employed persons than it did in November and 235,000 fewer unemployed people than it did in November.

This, all as the civilian labor force only grew by 243,000. This brought the employment to population ratio up to 60% from 59.8% and kept the participation rate steady at 62.5%. I had been looking for a fairly sharp increase in participation. Maybe I should turn in my "economist card." Then again, the rest of the crowd also gets the macro wrong. It at least bothers me when I'm wrong. I am, however, thrilled if my country is doing better economically than I thought, even if this is not a market positive.

Part-time employment is not a major part of this month's story, as 111,000 fewer individuals are working part-time for economic reasons and 134,000 more individuals are working part-time for noneconomic reasons. The Unemployment Rate (U-3) dropped from 4.2% to 4.1%, while the Underemployment Rate (U-6) dropped from 7.7% to 7.5%, all as the percentage of labor force participants unemployed for 15 weeks or longer (U-1) dropped from 1.7% to 1.6%.

Demographics

This is a rarity. According to this month's reports, gains were made across every racial, gender and educational demographic tracked by the BLS. I don't remember the last time I've seen this. I've seen it, but it's been a while. For December, from November, unemployment among:

• Adult men moved from 3.9% down to 3.7%
• Adult women moved from 3.9% down to 3.7%
• Teenagers moved from 13.1% down to 12.4%
• Whites moved from 3.8% down to 3.6%
• Black or African Americans moved from 6.4% down to 6.1%
• Asians moved from 3.8% down to 3.5%
• Hispanic or Latino ethnicities moved from 5.3% down to 5.1%
• High-school dropouts moved from 6.0% down to 5.6%
• High-school graduates moved from 4.6% down to 4.3%
• Some college up to associate degree grads moved from 3.6% down to 3.5%
• Bachelor's degree grads and beyond moved from 2.5% down to 2.4%

My Thoughts

This will be a case where good news for the economy is bad news for financial markets. Since these results were released, according to Fed funds futures markets trading in Chicago, the probability for no change at the January 29 FOMC policy meeting has increased to 97% from 95%, while the likelihood for no rate cut at all for all of 2025 has increased from 17% to 22%. 

There is still one 25 basis-point rate cut priced in for June 18, and no market for rate hikes in 2025, but let's be honest, once headline CPI prints above 3%, which is likely to happen if not for December, for January, those markets will have, much to the Fed's chagrin, have to start taking that possibility seriously.

If labor markets are really this strong and inflation has re-accelerated to the degree it has and looks to keep moving in an upward direction, then it is the central bank's responsibility to refocus on that side of their dual mandate. To do otherwise would be dereliction of duty.

As far as markets are concerned, since this report was released, the U.S. Dollar Index has spiked up into the 109s. In addition to that, the yield for the U.S. 30-year bond kissed the 5% level prior to moving back in a little and the yield for the U.S. 10-year note moved in the 4.78% area ahead of easing a little.

U.S. equities are taking it on the chin as you might have expected, with growth or technology stocks being hit hardest. Financials are also being slapped around as this labor market strength will likely mean that the short end of the treasury yield curve will no longer remain pinned as it has been, putting risk into net interest margin. Higher rates also could mean trouble for such important metrics as loan growth and that includes mortgages.

I will say this, it may be like threading a needle, but even with rates that hold steady or continue at the long end to move higher, properly enacted tax cuts coupled with more responsible public spending could maintain economic growth on the path it has been. That said, it will be easy to screw this up.

At the time of publication, Guilfoyle had no positions in any securities mentioned.