Job growth is expected to slow in December, but not enough to slow the Fed’s rate hikes

The economy is expected to have added 200,000 jobs in December, down from November but still strong enough for the Federal Reserve to continue to aggressively tighten inflation-fighting policy.

Economists polled by Dow Jones also expect the unemployment rate to hold steady at 3.7% in December, while average hourly wage growth slowed to 0.4% from 0.6% in November. 263,000 jobs were added in November.

The jobs report is due at 8:30 a.m. ET on Friday and is the last key monthly jobs data before the Fed’s Jan. 31-Feb. 1 meeting.

The data is important as the Fed tries to slow the simmering labor market in its fight against inflation. The central bank has raised interest rates seven times during this tightening period, and economists say it could rise by another half a percentage point in February, but futures traders are betting on just a quarter-point increase.

“I still think we’ll have a solid number on Friday. I don’t think things have slowed down that much,” said Bank of America Chief US Economist Michael Gapen.

Gapen expects 215,000 jobs to be added last month. “That’s double the job growth they wanted.” The December report may still show gains in seasonal hiring.

The Fed’s latest economic forecast shows unemployment rising to 4.6% in the fourth quarter. “Their forecasts predict that the unemployment rate will increase. We know that the equilibrium rate is between 70,000 and 100,000,” Gapen said. “If you need the unemployment rate to go up, you need jobs to go below 70,000 to 100,000.”

Gapen expects the monthly figure to turn negative in the first half of the year and remain negative for some time thereafter.

“We are now looking for evidence of whether the downturn in the core of the economy has spilled over into investment in housing and non-residential construction,” he said. “The next likely destination should be the commodity side of the economy.”

The Fed is willing to weaken the labor market because officials see the damage to the economy if they let inflation stay high, Gapen said. He sees construction as an industry that could lose jobs as the housing slump ripples through the economy.

“We have a lot of houses under construction. … We’ll be looking for mortgage lenders and real estate agents … people who have built and been fired from foundations. “That’s probably where you’ll see the construction cuts first,” he said. .

Aneta Markowska, chief financial economist at Jefferies, expects 175,000 jobs to be added, but she is mostly concerned about continued pressure on wages. He agreed with the consensus that wages rose 0.4% or 5% year-on-year in December, but said the figure could rise to 0.7% month-on-month in January as companies implement increases.

Economists fear that if wage inflation starts to rise, it could be a more difficult type of inflation to eradicate. The strength of the labor economy has surprised economists for months. For example, when the jobs and layoffs survey was released on Wednesday, November vacancies came in at a better-than-expected 10.5 million.

“I think what the JOLT data is telling us is that there is actually a slowdown in hiring. This is not because the demand for labor force is falling rapidly,” said Markovska. “It’s just that supply constraints are starting to bite. You see the attrition rate go up again. Growth workers are still going strong. … We potentially face more binding constraints on the labor market and, if so, expect more wage growth.”

Diane Swonk, chief economist at KPMG, said one area showing increased hiring was new businesses.

“A lot of what we’re seeing is demand-driven, not just by employers, but by the creation of new businesses that they suddenly have to compete with,” he said. “It’s a very different situation than what we’ve had in the past.”

The Fed has raised interest rates seven times since last March, and the Fed funds rate is now between 4.25% and 4.5%. Gapen and Markowska said the strength of the labor force warranted the central bank to raise interest rates by another half percentage point on February 1 and by a quarter point in March. However, many investors expect only a quarter-point increase in February, followed by another quarter-point increase.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed was trying to encourage investors to wait for higher interest rates for longer. This is evident in the minutes of the December meeting released on Wednesday.

“I think they’re trying to dissuade the markets from thinking that rates will come down quickly this year,” he said. “If you look at market expectations, the federal funds rate goes up to 5% in the short term, then comes down quickly later in the year. The message in the minutes is that rates will be higher for longer. As a result, who knows if they will keep the rates that high, but that is the message they want to send.

Zandi expects the economy to add 225,000 jobs in December.

“The labor market is slowing steadily, but definitely. This is not enough. I think the Fed would like to see job gains south of 100,000, close to zero, to move unemployment north and wages south. These figures show that we will advance rapidly in this direction.” “I think we’ll be at 100,000 in the spring and there will be zero months in the spring or summer.”

The jobs report could move markets because of its potential impact on the Fed.

“First of all, I would look at the salary. If jobs come to 250,000 or 300,000, I don’t think the market is overreacting,” said Michael Schumacher, head of macro strategy at Wells Fargo. “If the salary side is coming in at 0.5 or 0.6, that’s pretty disruptive. 0.3 is a non-event. It takes 0.2 for the market to move much, then the story starts to say that the Fed is almost done.

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