US labour market: Easing wage sum growth suggests Fed is moving in the right direction
|The December Jobs Report illustrated that the US labour market remains in healthy shape, but that wage inflation could be starting to ease. Importantly, wage sum growth appears to now moderate towards levels better consistent with Fed’s inflation target.
Labour demand remains high despite majority of economic leading indicators now pointing towards a modest recession. JOLTs Job Openings remained at 10.46 million in November, which is still a level consistent with wages rising 4-5% annually. Furthermore, the elevated level of voluntary quits, and still high ‘Jobs Plentiful’ index from Conference board’s consumer survey suggest, that workers’ confidence in finding new jobs remains high.
While the sectors which have been the most vulnerable to the weakening growth outlook and rising interest rates, such as banking or technology, have reported increasing job cuts, the total number of involuntary layoffs in the JOLTs survey remains low. Similarly, jobless claims have not yet increased markedly.
Leading labour market indicators do still point towards easing worker shortages. NFIB’s small business survey showed another clear drop in ‘positions not able to fill right now’ index, which is now only modestly above pre-covid levels. The Jobs Report suggested, that labour force participation increased by 439k, and consequently average hourly earnings growth eased to 0.3% m/m.
That said, we remain cautious about expecting a quick recovery in labour supply, as the monthly data has been volatile. The 724k monthly recovery in August was preceded by three months of stagnant growth. Furthermore, a large share of the decline in labour force participation is explained by early retirements, which are unlikely to reverse.
We have forecasted stagnant GDP growth for Q1 and a modest recession starting from Q2. While the December ISM services index pointed towards a sharp slowdown in service sector activity, we doubt the economy experienced an abrupt weakening as employment still grew by over 200 thousand, real wages likely recovered and financial conditions eased.
The upcoming recession is likely to be accompanied by further weakening in labour market conditions. The ongoing labour shortages vary across sectors, with especially leisure & hospitality still being hard hit (and accounting for a large share of the rise in average hourly earnings), but Fed naturally cannot concentrate the tightening efforts to only single sectors. We expect unemployment rate to gradually rise above 4% throughout 2023, but the extent of the rise depends on the persistence of inflation.
The easing wage sum growth reduces some of the tail risk of Fed having to hike its policy rate much beyond 5%, even if we still think markets Fed Funds pricing appears too optimistic. The key risk is that the easing financial conditions drive an uptick in economic activity before sufficient slack has been built into the labour markets, which could mean that wage-driven inflation stabilizes at too high levels. This is a key reason for why FOMC members have repeatedly warned against prematurely easing monetary policy especially, as the Chinese reopening poses renewed inflation risks for 2023.We think Fed is still far away from being confident about getting inflation down for good .
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