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

The economy is expected to add 200,000 jobs in December, down from November but still strong enough to sustain the Federal Reserve’s aggressive tightening policy to fight inflation.

Economists polled by Dow Jones also expect the unemployment rate to remain 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 employment report is scheduled for release at 8:30 a.m. on Friday and is the last key monthly jobs data before the Fed meets on Jan. 31 and Feb. 1.

The data is important as the Fed tries to slow a hot 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 raise another half a percentage point in February, but futures traders are betting on just a quarter-point increase.

“I still think we expect a solid number on Friday. I don’t think things have slowed down that much,” said Michael Gapen, chief U.S. economist at Bank of America.

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

The Fed’s latest economic forecast shows unemployment rising to 4.6% in the fourth quarter. “Their forecast is for the unemployment rate to rise. We know the casualty 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 that the monthly figure may start to turn negative in the first half of the year and then continue to turn negative for some time.

“Right now, the core economy is where we’re looking for evidence to see if the slowdown extends beyond housing and non-residential construction investment,” he said. “The next likely destination should be the goods side of the economy.”

The Fed is prepared for a weaker job market because officials will see worse damage to the economy if they allow inflation to remain high, Gapen said. He sees construction as an area that could shed jobs as the real estate slowdown ripples through the economy.

“We have a lot of homes under construction. … We’re going to be looking for mortgage servicers and realtors … people doing construction and breaking ground. That’s probably where you’re going to see layoffs in construction first,” he said. .

Aneta Markowska, chief financial economist at Jefferies, expects 175,000 jobs to be added, but she is most 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 number could rise to 0.7% month-on-month in January as companies implement increases.

Economists worry that if wage inflation begins to spiral, it is the type of inflation that is more difficult to eradicate. The strength in the labor economy has been surprising economists for months. For example, when the Job Openings and Layoffs Survey was released on Wednesday, it said there were about 10.5 million jobs in November, for example.

“I think what the JOLTs data is telling us is that there is actually a slowdown in hiring. It’s not because of a rapid decline in labor demand,” Markowska said. “It’s just that supply constraints are starting to bite. You’re seeing the layoff rate pick up again. Wage growth is still solid. … We’re potentially facing tighter labor market constraints, and if so, expect more upside in wages.”

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

“A lot of what we’re seeing is on the demand side, not just from employers, but new business formation that they suddenly have to compete with,” he said. “It’s a very different situation than what we’ve seen in the past.”

The Fed has raised interest rates 7 times since last March, and the Fed funds rate is now between 4.25% and 4.5%. Both Gapen and Markowska said labor warrants the central bank raising 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 and another quarter-point after that.

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

“I think they’re trying to trick the markets into thinking that rates are going to come down quickly this year,” he said. “If you look at market expectations, the Fed funds rate will go up to 5% in the short term and come down quickly at the end of the year. The message in the minutes is that rates will be higher for a longer period of time. Who knows if they’ll keep rates that high for longer at the end of the day, but sending That’s the message they want.”

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

“The labor market is steadily slowing, but it’s definitely not. It’s not enough. I think the Fed would like to see job growth south of 100,000, approaching zero, for unemployment to go north and wages to go south. These numbers show we’re going to move in that direction soon.” he said. “I think we’ll be at 100,000 in the spring and there will be months at zero in the spring or summer.”

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

Michael Schumacher, head of macro strategy at Wells Fargo, said: “I would look at wages first. If jobs go to 250,000 or 300,000, I don’t think the market will react much.” “If the wages side of that comes in at 0.5 or 0.6, that’s pretty disruptive. 0.3 is an unusual event. It takes 0.2 for the market to move a lot, and then the story starts that the Fed is almost done.”

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