Stansberry Research

Monday Morning Market Comments

C. Scott GarlissStansberry NewsWire

Morning Market Commentary:

  • The U.S. Bureau of Labor Statistics' December nonfarm payroll data was the weakest of 2022.
  • Monthly wage growth continued to slide.
  • Easing gains in employment and wages support the Federal Reserve slowing rate hikes.

Domestic employment gains aren’t as strong as they appear...

One thing you learn quickly while working on Wall Street is that there are two different clocks. There's Wall Street time, where seconds and minutes can feel like hours. And there's real-world time, where a month is like a drop in the bucket.

And often, that can be a problem for institutional money managers when it comes to economic data. They're caught up in the day-to-day stories, and they're looking for changes in the economy to occur right away. When the numbers don't materialize as they hoped, they get impatient.

It's the ones who take a long-term approach that are often the most successful. They cut through the noise to focus on the trend. That saves them from making rash investment decisions and selling investments too soon.

Recent employment data have presented such a dilemma... You see, the headline numbers look strong, but when we dig a bit further, we see they're not as rosy as they seem.

As we'll show you, recent hiring trends indicate that economic growth is slowing. That should allow the Federal Reserve to cut back on interest-rate hikes in the not-too-distant future. And as we've discussed before, when the central bank does ease up on its rate hikes, it'll be a major boon for risk assets like stocks...

On Friday, the U.S. Bureau of Labor Statistics released its nonfarm payroll figures for December. The data showed that nonfarm payrolls expanded by 223,000 during the month compared with Wall Street's expectation for 203,000 and November's downwardly revised 256,000. Once again, the bulk of the increase last month was driven by gains in the services sector. It added 180,000 new employees. For comparison, the goods-producing sector added 40,000 and the government added 3,000.

And while we're still seeing new job opportunities, December's numbers are the lowest gains we've seen in 2022. In fact, the last time we saw numbers this low was back in December 2020, when the country was being hit with a second wave of COVID-19 infections. That was the last time we experienced an employment contraction.

Even more, last week's data is well below 2022's monthly average gain of 375,000 and 2021's typical monthly gain of 562,000...

The number of people who want a job but are not actively looking came in at 5.2 million. This was down by about 352,000 from November, though it's around 100,000 higher than pre-pandemic levels. However, those individuals aren't considered unemployed persons because they're not actively seeking work.

The total number of unemployed persons dropped to 5.7 million in December compared with November's total of 6 million. And the unemployment rate fell to 3.5% compared with the expectation for it to remain flat at November's unemployment rate of 3.7%.

In the eyes of the Fed, a higher unemployment rate suggests a labor market that's loosening and an economy that's weakening. And while December saw the lowest job gains in 2022, the unemployment rate falling implies the central bank's interest-rate hikes aren't having the desired effect. And this could mean even more rate hikes down the road.

But we also need to look at the broader picture...

First, let's observe the job gains in 2022 compared with what we saw in 2021. In 2021, the government and the central bank flooded the economy with more than $10 trillion worth of stimulus. Individuals had plenty of cash and were busy spending, which meant there was a huge demand for goods and the need for even more workers.

Fast-forward to 2022... As we saw, all of that buying power caused runaway inflation. Manufacturers couldn't keep up with the demand for goods. The prices for raw materials jumped, driving up production and manufacturing costs. Consequently, prices for everything from iPhones to gasoline skyrocketed.

The Fed had to do something to fix the problem. It began raising interest rates. That meant it cost more to borrow money and service debt. The disposable income of households and businesses shrank, and they ended up spending more on less. In turn, there was less demand for goods and also less hiring. You can see this in the year-over-year job gains below...

Now, it's not just the slowdown in hiring that's noticeable in last week's numbers... We're also seeing lower salaries.

Last year, when companies couldn't keep up with demand, they scrambled to attract new employees. The best way to do that was by offering higher salaries. So, individuals could be much pickier in the jobs they chose. As a result, average hourly earnings shot up...

As we can see in the chart above, income growth was nonexistent in early 2021 when individuals and businesses were still dealing with rampant COVID-19 infections. At the same time, the population was just starting to become inoculated against the virus on a widespread basis. Because they were afraid of becoming infected, they were staying at home and not spending. So, wage growth was hurt as demand for goods and services remained low. Thought of another way, businesses didn’t need to pay up for workers.

Then, Congress passed a third stimulus package, which extended unemployment benefits and gave families child tax credits. This led to a rise in savings and consumer spending. And as we can see in the above chart, the need for workers to keep up with that demand led to a surge in wage growth.

However, the stimulus checks were a one-time event, the unemployment benefits ended in the fall of 2021, and the tax credits ended shortly after that. Then, in March of last year, the Fed began raising interest rates to fight inflation, driving up the cost of loans.

The net effect of these actions was less money for households to spend. That meant less demand for goods. To see what I mean, take a look at this chart from the Institute for Supply Management. It shows new orders from the December manufacturing Purchasing Managers' Index. And as you’ll notice, they’re in steady decline, having reached the lowest level since early 2020...

As new orders start to fall, there's less of a need for companies to produce goods. That means they don't require as many workers and don't need to pay higher-than-normal salaries to acquire new ones.

Based on the current trend, if businesses aren't careful, they run the risk of having too many workers with nothing to do. If that happens, companies could start losing money on payrolls. That could force subsequent rounds of firing to bring costs in line with current demand.

Last week's data may come as a short-term disappointment to some on Wall Street. But if we see the payroll gains continue to slide, it should point to a labor market that's loosening. And as we've said before, a cooldown in the jobs market will support the central bank pulling back on interest-rate hikes – or even stopping them altogether.

The change will boost the long-term outlook for the economy, giving it time to breathe, and enabling the inventories of goods and raw materials to stabilize. That will allow them to return to pre-pandemic levels of normal rather than being in a state of constant extremes, higher and lower. The change should provide more price stability going forward.

And, as that happens, it will provide room for the central bank to stop raising rates and possibly begin lowering them once more. The change will encourage individuals to put more money back to work investing in the stock and bond markets.