Demand for Labor Remains High as Hopeful Signs of Healing Supply Chains Emerge

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) December 14-15 meeting showed that in addition to doubling the speed of asset purchase tapering, “participants judged that the timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the Committee’s previous experience” due to a stronger economic outlook, strong and broad-based inflation, and a larger balance sheet.  “Almost all” participants indicated that a balance sheet runoff would likely be appropriate after the first interest rate increase, which could occur as soon as March.
• Nonfarm payroll employment increased 199,000 in December, according to the Bureau of Labor Statistics (BLS). The household survey diverged greatly from the establishment survey for a second consecutive month, showing a stronger 651,000 workers added and the unemployment rate at 3.9 percent, a decline of three-tenths. The labor force participation rate was unchanged at 61.9 percent but still 1.5 percentage points lower than in February 2020. Average hourly earnings rose by a brisk 0.6 percent over the month, but due to base effects (i.e., the height of last December’s level), the annual change decelerated slightly from the previous two months to 4.7 percent.
• The Job Openings and Labor Turnover Survey (JOLTS) showed there were 10.6 million job openings in November, a decline of 529,000 from October but still the sixth straight month in which available jobs exceeded 10 million, according to the BLS. Openings in leisure and hospitality fell by 268,000 to 1.5 million, the lowest level since April. Total quits set another series record at 4.5 million, driven partially by 6.4 percent of workers in the leisure and hospitality industry leaving their jobs, also a series record.
• The ISM Manufacturing Index fell 2.4 points to 58.7 in December, its lowest level since January 2021 and the largest single-month decline since April. However, any reading over 50 indicates expansion. The new orders index fell 1.1 points to 60.4, and the production index was down 2.3 points to 59.2. The prices paid index fell 14.2 points to 68.2, and the supplier deliveries index declined 7.3 points to 64.9, each reaching their lowest levels since November 2020.
•  The ISM Services Index fell 7.1 points to 62.0 in December, the largest single month drop since April 2020 but still the tenth consecutive month above 60, a level the series had only achieved eight times before the current streak. The supplier deliveries index fell 11.8 points to 63.9, while the new orders index dropped 8.2 points to 61.5.
• Factory orders increased 1.6 percent in November, the largest since May, according to the Census Bureau. However, excluding transportation, orders were up a more modest 0.8 percent, while core capital goods orders were essentially flat. Nondurable goods orders and inventories for all manufactured goods rose 0.7 percent, as did total shipments.
• Light vehicle sales declined 3.1 percent to a seasonally adjusted annualized rate of 12.7 million, according to Autodata.
• Private residential construction spending increased 0.9 percent in November, according to the Census Bureau. Single-family construction spending rose 1.2 percent, the largest monthly gain since June, while multifamily construction spending declined 0.3 percent. Spending on improvements was up 0.9 percent.
• The real goods U.S. trade deficit widened by $13.7 billion to $110.8 billion, only $260 million short of the record set in September, according to the Census Bureau. Real exports declined 2.5 percent, while real imports increased 4.0 percent, the largest monthly increase in imports since March 2021.

Forecast Impact:

The establishment survey disappointed for a second straight month, though the more positive household survey, along with high job openings and robust wage growth, continue to point to high demand for workers. While we will likely modestly downgrade our near-term labor forecast, we believe the Fed will consider today’s report a sign that the labor market is still approaching full employment, and therefore won’t lead to any delays in policy tightening. Although the Omicron variant poses some near-term risks to employment, we expect its economic effects will generally be modest and short-lived. However, we expect workers calling in sick or employed workers staying home will exacerbate supply-side contributions to inflation in the near term.

Part of the decline to the manufacturing and services indices were due to sharp falls in the supplier deliveries component. While the values remain well above 50, indicating further increases in delivery times, the rate of change is decelerating. However, neither of these surveys captured the potential supply-side disruptions likely to be caused by Omicron, as the highly contagious variant is resulting in absenteeism across industries and is likely to cause yet another short-term disruption to the eventual resolution of supply chain bottlenecks. On net, we interpret this as consistent with our expectation of increasing inflationary pressures in the near term but significant easing of supply chain drivers later this year.

The widening trade deficit is likely to cause a small downgrade to our 2021 Q4 GDP forecast, though a related increase in business inventories will likely offset the negative growth impact somewhat. Vehicle sales remained subdued, a trend we expect to reverse in the early part of 2022 as the semiconductor shortage eases, which will stabilize prices in both the new and used car markets. We expect that as auto manufacturers restock new car inventories, prices for used cars will first stabilize over the first half of this year and then eventually drag on topline CPI toward year end.

Nathaniel Drake
Economic and Strategic Research Group
January 7, 2022

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