💵 Let's Get Messy

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Payrolls & ISM Services data are due. Each release is going to get messier. 

Consensus is clear. Payroll growth is going to start dropping this year. Today's print is expected at a nice round 200k, down from the prior 263k. That would be the lowest print since December 2020.

But, that's far from the end of it. Wells Fargo (and others, but we'll stick with WF) analysts see things deteriorating further this year, albeit from a very strong starting point:

A holistic look at the existing labor market data suggests that directionally the labor market is weakening, but at a measured pace and from a remarkably strong starting point. Even with some recent cooling, the labor market remains very tight, and nominal wage growth is still well above what would be consistent with the central bank's 2% inflation target.

That's a very good summary of where we are right now. Digging a little deeper, they see demand for new workers already slowing along with hiring intentions. 👇

As 2022 progressed, signs emerged that demand for new workers was rolling over.

Job openings peaked at nearly 12 million in March of last year but have subsequently fallen by 12%. Similarly, job postings according to Indeed’s Hiring Lab have gradually declined over the past year. The share of businesses planning to hire according to the National Federation of Independent Business is now back on par with 2019 levels.

The trend in initial jobless claims and layoffs/discharges is not worsening, but it is no longer improving either. Planned layoffs are picking up.

While starting from a low base, the upward shift in planned layoffs has been steep and comes when the Fed is less willing to help shore up the labor market than recent periods when announcements were similarly high. Anecdotal reports from the Federal Reserve's Beige Book suggest there are "scattered layoffs" in some sectors such as technology, finance and real estate.

Finding new employment for recently laid-off workers is not such a snap either, with continuing claims for unemployment insurance rising over the fourth quarter.

But this is the chart that keeps the Fed awake at night 👇

Job openings have fallen from their peak but are still nearly 50% above their pre-pandemic level. Workers are still voluntarily job switching at elevated rates, a sign that people remain confident in their ability to find a new and improved opportunity

Despite headlines about some companies cutting back on staff, layoffs and initial/continuing jobless claims remain below 2019 levels.

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And this is the chart that gives them nightmares... 👇

In the context of today's NFP data, the Fed, and the stock market will want to see wage growth cooling (average hourly earnings is expected at 0.4% vs 0.6% last month), and fewer jobs added. A strong beat on either metric could add to concerns that the Fed is genuinely serious about not cutting in 2023.

(Not sure why there's any doubt given current trends, but anything can happen?)

An hour and a half later, the ISM Services (non-manufacturing) data comes into focus. It's all about the sub-indices.

  • New Orders (56 previous)

  • Employment (51.5 previous)

  • Prices Paid (70 previous)

New orders as a proxy for demand. Higher demand is usually due to a strong economy, meaning more highs, less fires for the employment index.

Prices paid as a proxy for inflation. Market wants to see this much closer to 50. Will it follow the same path as the ISM manufacturing data we mentioned yesterday? 👇

The big trend to watch this year is undoubtedly whether workers are wrestling back power from employers. Is there a true rebalancing of the scales between labour and capital?

We'll find out, but these kind of proposals certainly help move things in that direction (if passed) 👇

 Agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans /2 pic.twitter.com/1fNvYu52aF— FTC (@FTC) January 5, 2023 

And a great example of these clauses being misused... 👇

 Noncompete clauses are bad for workers and the economy. Increasingly they are used to bind low income workers to their job.

Most infamously, Jimmy John’s forced low wage employees to pledge they would never work for another fast food restaurant.— Chris Murphy (@ChrisMurphyCT) January 5, 2023 

Transitory worker power or the new normal?