Interpreting Subtle Shifts in Employment Data | Episode 088 | 01-05-24

Join Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, as she reviews the latest jobs report. While the headlines flash the creation of 216,000 new jobs, Megan looks behind the headlines, revealing a potential slowdown in the workforce. This episode isn't just about the numbers; it's an exploration of the subtle shifts that suggest bigger economic currents are at play. From the surprising dip in labor force participation to the rise in average hourly earnings, Megan's analysis considers the nuances that might escape a casual glance, and what these changes suggest about the future of inflation and the Federal Reserve's next moves.

How will a near-contraction in the ISM services report affect where we spend our money? What does the increase in part-time employment for economic reasons mean for the overall job market? As we dissect these indicators, we also confront the market's reaction—equity rallies and dips in bond yields—while forecasting the Fed's interest rate decisions. 

Watch today's episode here: 

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan, and we want to talk about the jobs report that we got today. At first glance it looks like a great report. We created more jobs than expected 216,000 jobs. In December the estimate was 175,000 jobs. That's great. But when you look at a lot of the underlying trends in this report it's showing this is kind of cooling in the labor market. So let's dig into what we saw. The unemployment rate was unchanged at 3.7%. The average hourly earnings they actually rose more than expected and on a year-over-year basis they're rising 4.1% the work week. So the number of hours that were worked that declined. And then the labor force participation actually retreated and declined as well. Now, looking in this report, when you look at the household survey, employment dropped by 683,000. This is the largest drop we've seen since April of 2020. Some of the things that we look at that tend to occur first, before you start to see layoffs or the unemployment rate rise, are things like the work week we mentioned that declined, the temporary workers, more people working part-time instead of full-time for economic reasons. These things all started to show signs of weakness in the labor market. When you look at what the Fed's going to take from this report, I think they'll be concerned about that rise in average hourly earnings. That's that sticky inflation, that wage inflation that we've discussed. But we are starting to see signs that the weaknesses is emerging in the labor market. This should help ultimately keep that wage pressures in check.

We don't think that the Fed's going to be raising interest rates in March. Sorry, cutting interest rates in March. This is the consensus view. This report does not say that that's going to happen. And then when you look at what the market's reacting today, equity markets are rallying, bond yields are down.

It's not because of the employment report. It's actually because of the report we got after that on the service side of the economy ISM services. So this is where we spend the majority of our money on services, not necessarily goods. This has been really a strength that we've seen all through last year and what you're seeing is this index actually is pretty close to contracting. That level below 50 means that services is contracting. We're very close to that.

But the biggest part of this report was the employment component. That actually fell the most on a monthly basis that we've seen since April of 2020. And it is deeply in contraction territory. The other side of this the Fed's going to take a look at is the prices paid component. This is inflation in services. This is the highest component of the index. It did moderate a little bit for the month, but it's the strongest part of this index, which means that the inflation pressures are not completely behind us yet. That's what the Fed's going to pay attention to, and that confirms our view and our out of consensus view, that the Fed is not going to be cutting rates anytime soon. That's all we have today. We'll be back next week with more economic data, and next week we'll get more inflation data for you. If you have any questions or comments, please feel free to reach out to podcast at verdence dot com. Thank you.