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Economic & Housing Weekly Note

Labor Market Much Stronger than Previously Thought as Manufacturing, Services Sectors Remain Resilient

February 4, 2022

Key Takeaways:

  • Nonfarm payroll employment rose by 467,000 in January, according to the Bureau of Labor Statistics (BLS). As part of its annual benchmark process, BLS also revised upward the November and December payroll numbers by a combined 709,000, though this was largely offset by significant downward revisions to the summer months. Still, this points to a much stronger recent employment growth trend than previously thought, as about 600,000 jobs per month were created on average over Q4 of last year. The unemployment rate ticked up one-tenth to 4.0 percent as the labor force participation rate was revised upward by three-tenths to 62.2 percent as part of the annual adjustments to population controls. Average hourly earnings increased 0.7 percent over the month and 5.7 percent over the year, the fastest annual growth rate in series history when excluding the likely distorted numbers in the months following the initial COVID outbreak.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings increased by 150,000 to 10.9 million in December, according to the BLS. Openings in construction fell 21,000 to 337,000, the lowest level since May 2021, while openings in leisure and hospitality jumped 131,000 to 1.7 million. Quits declined but remained historically high at 4.3 million, or 2.9 percent of the workforce.
  • Nonfarm business productivity increased 6.6 percent annualized in Q4 2021, according to the preliminary estimate from the BLS. The annualized data showed unit labor costs rose only 0.3 percent, a sharp deceleration from the 9.3 percent in Q3, and real output jumped 9.2 percent. Real compensation per hour fell 1.2 percent annualized, the fourth straight quarterly decline. For the year, productivity was up 1.9 percent, the slowest annual growth rate since 2018.
  • The ISM Manufacturing Index declined 1.2 points to 57.6 in January, the lowest level since November 2020 and the third straight monthly decline, though any reading above 50 indicates expansion. The new orders index dropped 3.1 points to 57.9, the lowest level since June 2020. The prices paid index jumped 7.9 points to 76.1 after falling 14.2 points in December, while the backlog of orders index dropped 6.4 points to 56.4, its lowest level since October 2020.
  • The ISM Services Index fell 2.4 points to 59.9 in January, the lowest level since February 2021 but still above the expansionary threshold of 50. The business activity index dropped 8.4 points to 59.9, while supplier delivery times edged back up as the index increased 1.8 points to 65.7 after declining sharply in December. The prices paid index was down modestly, declining 1.6 points to 82.3, though it remains historically high.
  • Durable goods orders declined 0.7 percent in December, though this was largely due to a 13.5 percent decline in aircraft orders, according to the Census Bureau. When excluding transportation, durable goods orders were up 0.6 percent. Core capital goods orders (nondefense excluding aircraft) increased 0.3 percent. Inventories of durable goods grew 0.8 percent, the 11th consecutive monthly increase.
  • Light vehicle sales jumped 19.3 percent to a seasonally adjusted annualized rate of 15.2 million, the highest level since June 2021.
Forecast Impact:

January employment gains exceeded expectations, both our own and the market’s, as Omicron-related worker absenteeism had a minimal effect on hiring and payrolls. Further, after the BLS revisions, employment gains over the past several months have been far stronger and more consistent than initially thought. We also note that the upward revision to the labor force participation rate suggests there are fewer “missing workers” who may eventually re-enter the labor force and ease wage pressures than previously thought. The labor market clearly remains tight, as wage gains accelerated again in January, the quits rate remained elevated over levels never seen before March 2021, and the number of job openings continued to exceed the number of unemployed workers in December. We believe this will fuel longer-term inflationary pressures through 2022 and 2023, especially given that, despite a strong Q4 reading, productivity increased at a far slower pace than wage growth last year. We believe the Fed will also view this jobs report as another sign of a robust labor market at or nearing full employment and will continue on its course to begin hiking rates in March.

Economic output also appears to have remained resilient despite the absenteeism caused by the Omicron variant, as core durable goods orders were up and both the ISM services and manufacturing indices remained solidly in expansionary territory in January, though the pace of expansion has slowed. Still, we believe worker absenteeism has prolonged supply chain woes, and thus near-term inflationary pressures, as the January readings of the services and manufacturing indices partially reversed apparent progress made in December: The manufacturing supplier deliveries index was essentially flat, while the counterpart for the services index increased and the prices paid indices remained elevated for both surveys. Encouragingly, however, light vehicle sales increased and, according to the ISM Manufacturing Index, the backlog of orders fell sharply. On balance, while we expect a substantial temporary slowdown in GDP in Q1, in large part due to the surge in inventory investment in Q4 not being sustainable at that pace, we believe the 2022 growth outlook remains solid as wage gains and pent-up savings will support consumption growth (albeit at a much slower rate than the elevated levels seen in early 2021) and the ISM indices are consistent with continued solid economic expansion. The big uncertainties revolve around high inflation and rising interest rates potentially dampening real demand.

Nathaniel Drake
Economic and Strategic Research Group
February 4, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management..