Labor Market Remains Bright Spot in Economy, While Manufacturing and Residential Construction Continue to Decline

Key Takeaways:

• The minutes from the Federal Open Market Committee (FOMC) December 13-14 meeting showed that committee members remained committed to an aggressive monetary policy stance, stating "it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path." The minutes also warned that "an unwarranted easing in financial conditions" caused by investors expecting a policy reversal later in the year would "complicate the committee’s effort to restore price stability." Noting a tight labor market and nominal wage growth above what would be consistent with 2 percent inflation, the minutes stated that ongoing increases in the fed funds rate would be appropriate.
• Nonfarm payroll employment rose by 223,000 in December, bringing the 2022 total jobs added figure to 4.5 million, according to the Bureau of Labor Statistics (BLS). Leisure and hospitality and health care employment each had another strong month, adding 67,000 and 55,000 jobs, respectively. Residential construction employment, including specialty trade contractors, rose by 9,500, the sector’s best month since June. The unemployment rate declined two-tenths to 3.5 percent. Average hourly earnings rose 0.3 percent over the month, a deceleration compared to November, and were up 4.6 percent over the year.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings were little changed at 10.5 million in November, according to the BLS. Layoffs and discharges remained at a subdued 1.4 million (they averaged 1.8 million in 2019), while the quits rate ticked up one-tenth to 2.7 percent, above historical norms.
• The ISM Manufacturing Index declined 0.6 points to 48.4 in December, marking the index’s fourth consecutive decrease. The new orders index fell 2.0 points to 45.2, the lowest level since 2012 when excluding the initial COVID shock. The production index was down 3.0 points to 48.5, its first time below the expansionary threshold of 50 since May 2020. Declining demand appears to be easing supply chain and input cost pressures as the supplier deliveries index declined 2.1 points to 45.1, its third consecutive month below 50, and the non-seasonally adjusted prices paid index fell 3.6 points to 39.4.
• Light vehicle sales fell 5.6 percent to a seasonally adjusted annualized rate of 13.6 million in December, according to Autodata. For the year, sales were down 7.6 percent to reach the lowest annual level since 2011.
• The real goods U.S. trade deficit narrowed by $15.9 billion in November, according to the Census Bureau. Real imports dropped 7.4 percent, while real exports were down 2.6 percent.
• Private residential construction spending was down 0.5 percent in November, the sixth consecutive monthly decline but the smallest such decline in that period, according to the Census Bureau. Spending on single-family construction dropped 2.9 percent but was partially offset by 2.4 percent and 1.3 percent gains in spending on multifamily construction and improvements, respectively.

Forecast Impact:

The labor market remained strong in December, though the pace of hiring has gradually slowed over the past five months, largely in line with our expectations. There were some signs of a general softening for labor demand, though, as wage growth slowed modestly in December from a downwardly revised November reading and employment in temporary help services, a traditionally leading indicator of the labor market, declined for the fifth consecutive month. Still, job openings and quits remained elevated in November, suggesting current wage pressures above levels consistent with 2 percent inflation. With nominal wage growth explicitly called out in the FOMC minutes, we expect a continued tightening stance from the Fed in the coming months.

While the labor market has remained resilient in the face of tightening monetary policy, weakening in economic conditions is evident elsewhere. The highly cyclical manufacturing industry has contracted for two consecutive months and is approaching levels consistent with a recession. Additionally, single-family residential construction continues to soften in light of elevated mortgage rates. Finally, while the narrowing of the trade deficit technically improves our net exports expectation for Q4 GDP, the large drop in imports suggests consumption and business investment are softening. Therefore, while we are likely to upgrade our Q4 2022 growth estimate, we continue to expect the economy to slow and enter a modest recession in the first half of 2023.

Nathaniel Drake
Economic and Strategic Research Group
January 6, 2023

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