National employment trends keep slowing…
This week brings an important update as it relates to the Federal Reserve’s monetary policy plans. On Friday, the U.S. Bureau of Labor Statistics (“BLS”) releases its payroll data for December. Consensus estimates put the number of gains around 150,000. If the number proves to be correct, that would be a sharp slowdown compared to last month’s increase of 227,000 employees. However, that would be more in-line with the year-to-date monthly average of 180,000 employees added.
The pending data is important to the Fed because it conveys a sense of the economy’s health. You see, if employment gains are rising, it tells policymakers the economy may be about to heat up. And, if the same data is falling, it can send a message that spending and economic growth are headed lower.
Now, at the end of December, central bank policymakers threw Wall Street for a loop. As part of the Summary of Economic Projections, policymakers guided their inflation outlook for 2025 higher. They raised it from 2.1% in September to 2.5%. The change worried Wall Street about the potential for pausing interest rate cuts next year, causing stocks to drop.
But over the weekend, two Fed officials told us what would make them increase the pace of rate cuts in 2025. Board Member Adriana Kugler and San Francisco Fed President Mary Daly expressed concerns about the pace of job gains. They said if high interest rates cause hiring to slow, they’d support easing more to stem any economic fallout.
Well, based on recent surveys from regional Fed banks, businesses are hiring less. That means the national numbers will show a slowdown when the December numbers are reported. That will undermine Wall Street’s pessimistic outlook on monetary policy and support a steady rally in the S&P 500 Index.
But don’t take my word for it, let’s look at what the data’s telling us…
Every month, a number of regional Fed banks reach out to manufacturing and services companies in their districts. They ask those businesses about the level of activity they’re seeing. They want to gauge whether commerce has improved, worsened, or stayed the same.
I like to follow the results from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Those four districts combine for about 25% of national gross domestic product. By looking at the results we can get a sense of what’s transpiring nationally. In addition, the data comes out just before the end of each month, so it’s like having an early look into what might unfold when entities like the BLS release market-moving data.
Today, we’re just focusing on the employment results. I want to break it down by the individual parts and then consider them together. So, let’s start with the manufacturing survey results…
In the above chart you’ll notice hiring in the manufacturing sector tends to be very close to the national picture. We can see that both trends rose together as the economy rebounded from the pandemic and now, they’ve slowed at a similar pace. Based on the data, hiring slowed in December.
Now look at this chart from those same regional Fed banks’ services sector surveys…
Like the manufacturing numbers above, the data tends to track relatively closely to the numbers from the BLS. More importantly, it’s a leading indicator of the national employment picture. And these numbers are also telling us employment gains slowed.
But to really get a sense of what’s going on, I combined the two sets of data into a single chart. Based on the breakdown of domestic employment, I gave the services data an 80% weighting and the manufacturing numbers a 20% weighting in the combined number…
If we look to the far right of the chart, we can see the most recent activity. Notice the blue line rose in November, indicating national hiring would rebound. If you recall, nonfarm payrolls increased by 227,000 that month, as reflected by the sharp rise in the orange line. But now, when we look at the December combined manufacturing and services survey result, we can see that employment gains slowed once more. That tells me that we’re likely to see nonfarm payrolls around the 2024 monthly average of 180,000 or lower.
The month-to-month numbers can be choppy looking due to the swings. I wanted to put them in better perspective by smoothing out the trend by looking at the rolling three-month average…
As you can see, by making this slight change, the trend lines are less jagged than what we saw in the earlier charts. These lines show us that the manufacturing and services hiring numbers tend to lead the nonfarm payroll data when it comes to hiring trends. And, based on what I see in the above chart, the pace of monthly job gains is stabilizing around pre-pandemic levels, after several years of huge gains.
Since it started raising interest rates in 2022, the Fed has been singularly focused on slowing employment gains to kill economic and inflation growth. And prior to the inflation outlook shift in December, it told us decisions are based on what the data indicates. Well, according to the data we just surveyed, the labor market keeps slowing. And based on what we’re hearing from some of the Fed’s members, they’re worried that if it doesn’t get ahead of the hiring problem, the economic fallout will outweigh any inflation upside potential.
At the end of the day, weaker numbers are likely to make policymakers and Wall Street rethink their pessimism as it relates to rising inflation and the rate cut outlook. The shift will highlight the support potential for stable economic growth and a steady rally in the S&P 500.
If you'd like to receive more content like this to your inbox daily, click here to sign up.
