Jobs Friday: December 2021

As a financial advisor and someone who loves the study of economics, “Jobs Friday” is the highlight of my month. It is a signpost of where the economy has been for the past month or two, as well as giving clues about where it is headed in the coming month. Information derived from the Jobs Report posted by the US Dept of Labor is used by the Federal Reserve to judge, manage, and adjust monetary policy. Politicians on both sides use the information to justify and drive fiscal policy.

For this month’s report the expectation was for the economy to have created 550,000 new jobs. One factor going into the jobs report that is a concern is ‘how many people are going to come back into the labor market?’ Currently, economists estimate that nearly 8 million people are still out of the labor force, having left at the beginning of the COVID pandemic in February 2020. (3)

In October 2021 the Fed committed to start tapering their use of Quantitative Easing (a policy of the Fed buying Treasuries and mortgage backed securities) to support markets. This tapering means the Fed would buy $10 billion less of treasuries and $5 billion less of MBS each month. While there is a fear that the Fed stopping QE could disrupt markets, there is also fear that if the Fed doesn’t stop QE inflation could get out of hand. (4)

Since the summer, measures of inflation have risen dramatically.

Some economists expect the Fed to begin raising interest rates by the middle of 2022 to control inflation.

Not everybody is as optimistic. Priya Misra of TD Securities doesn’t expect the Fed to raise rates until March of 2023. “There is a clear sign Chair Powell is spooked by inflation. As fiscal drag kicks in next year growth will slow and allow the Fed to raise rates in 2023 instead of 2022.” Misra continues, “Hiking has a higher threshold than tapering. The later they wait the less chance there is for a policy mistake… and if the Fed is behind the curve why only raise rates 1 ½%? The Fed is going to hold off for longer.” (1)

In the background, when considering growth prospects for 2023, is the Omicron variant. On Friday Dec 3^rd New York reported 5 cases of the variant. New COVID cases are at the highest since January 2021. “NY hospitals continue to fill up on COVID cases.” (1)

On Bloomberg, Tom Keene asked Ellen Zentner of Morgan Stanley, “what kind of 4.4% unemployment rate is this America?”

Zentner responded saying, “We have seen a record wave of retirements, accelerated especially with health concerns around COVID and government support allowing retirement for many. We are seeing retirement across all income groups. This is driving employers to offer more for new workers.” (1)

Keene asks, “What if the supply constraints continue?”

Zentner said, “The fear is that the Fed says ‘this is temporary, this is temporary… wow this is not temporary…’ If easing supply chain stress doesn’t flow through, this can drive the Fed to accelerate raising rates.”

Lisa Abramowitz, another Bloomberg host asked if Powell will be forced to deemphasize the labor market in their policy discussions?

Zentner said, “The Fed is getting backlash from both sides due to inflation. The Fed can’t do anything about supply constraints, but they can dampen (lower) expectations by raising rates. The Fed is putting the focus on inflation and let inflation show you that it is slowing. The Delta variant was a Q3 hit to the economy, but now (in early December) we are on pace for 8% GDP… what will the impact of Omicron be is still to be seen.”

In fact, expectations for CPI in early December is for inflation of 7% through the first quarter of 2023. That will be troubling for the Fed. (1)

Less optimistic was Savita Subramantan of Bank of America Securities. “I think TINA (‘there is no alternative’, a phrase that has been used to justify more risk taking by investors) is in peril. Negative real rates (low bond yields and high inflation at the same time) are not normal. This looks very similar to 2000 and also the mid 1970s where people were not prepared for the changes that were creeping into the economy.” (1)

She continues, “We are seeing some really funky stuff happen in markets right now. I think the bubble is in the bonds… negative rates are abnormal. We are more likely to see rates volatility… we are more likely to see equity volatility. Our market forecast of 4600 on the SP500 (currently 4585) in the next 12 months is a tough grind; we see a flat market but very choppy.” This is radically different from the market investors have seen over the past 2 years.

The Jobs report for December proved to be relatively strong and good overall. However, the job creation number came through at 210,000 instead of 550,000 as expected. (1)

The participation rate improved to 61.8 from 61.6 last month, showing more workers reentering the labor force.

Wages were up .3% compared to .4% increase last month.

The unemployment rate dropped to 4.2% from 4.6% last month.

Following the jobs report Jon Ferro of Bloomberg interviewed Mohamed ElArian of Queens College and Rick Reider of Blackrock.

ElArian said, “Based on the report, the Fed has a window to move. We could end up with a high risk of a policy error, the problem is the impact the mistake will have on the economy. The economy can not support 4-5% rates. Things start breaking… that is why it’s important to start tapering early.” (2)

Reider followed saying, “We could get a nominal GDP increase of 11% this year, with a real (inflation adjusted) increase of 3%… The question is how much the economy will decelerate in 2023.”

While discussing the recent market selling Reider said, “The Fed needs to exit this QE business… it’s crazy. There are areas that are starting to become unglued; investors need to be more careful and more opportunistic. There is unbelievable illiquidity in the markets.”

ElArian discussed the impact of Omicron as we move into 2023. He said, “We are seeing mixed signals of government reactions, not a common response as in 2020… This will make supply chain problems persist longer. It will make labor issues persist longer.”

If you have questions or want to discuss risk management for your portfolio in an increasingly volatile environment, email me at james.cox@glic.com

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