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Eakinomics: Labor Market Rorschach Test
How’s the labor market doing? The answer, it turns out, is very much in the eye of the beholder. Begin with Friday’s Employment Report for December from the Bureau of Labor Statistics. The data showed 216,000 new jobs, an unemployment rate unchanged at 3.7 percent, and average hourly earnings rising 4.1 percent (year-over-year). The coverage of The New York Times was typical: “The U.S. labor market ended 2023 with a bang, gaining more jobs than experts had expected and buoying hopes that the economy can settle into a solid, sustainable level of growth rather than fall into a recession.” Taken at face value, the report was good news for the administration, but bad news for the easy-money-can’t-wait-for-rate-cuts crowd.
But dig a little deeper and some of the bloom comes off the rose. Government jobs accounted for 52,000 of the jobs, and the remainder were concentrated in health and leisure and hospitality. Not exactly solid, broad-based growth. Worse, as Gordon Gray points out, there is a complete disconnect between the payroll survey (the source of the jobs number) and the household survey (the source of the unemployment rate). The December household survey showed 676,000 people leaving the labor force and 683,000 fewer people with jobs. That's hardly a hot labor market, and this offset is the only way that the unemployment rate stayed unchanged.
Ninety minutes after the employment report, the ISM Report on Business for services delivered a stunner. The employment index flipped from 50.7 in November to 43.3 in December – indicating a reversal from growth to contraction. As the report put it: “The services sector had a pullback in the rate of growth in December, attributed to the decrease in the rate of growth for new orders and contraction in employment. Respondents’ comments vary by both company and industry. There are concerns related to economic uncertainty, geopolitical events and labor constraints.”
The ISM report comes on the heels of a Job Openings and Labor Turnover Survey (JOLTS) for November that featured a drop in the hiring rate to nearly a four-year low.
So, is this a labor market that remains shockingly hot, and requires the Fed to hold steady – or even raise rates? Or, is it a labor market that has more than cooled and sits on the precipice of contraction? It’s in the eye of the beholder.
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