Messy Jobs Report Unlikely to Change Rate Hike Path

A disappointing jobs report against a messy backdrop of uncertain seasonal adjustments, diverging internal surveys, unknown future effects from the Omicron variant, and the expiration of the monthly child tax credit is unlikely to alter the course of the Federal Reserve, which likely will be watching for greater clarity over the next couple of months.

According to the Bureau of Labor Statistics on nonfarm payrolls, the U.S. economy added 199,000 jobs in December, well short of the consensus expectation of 450,000 and the second straight big miss. On the other hand, the Department of Labor survey that gives us the unemployment rate saw 651,000 new workers in December, pushing the unemployment rate down to 3.9% from 4.2% per the Household Labor Force Survey.

“In the last economic cycle, the unemployment rate did not break below 4% until May 2018, a year that included four rate hikes,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “The bottom line is that seasonal adjustments, diverging surveys, and a volatile economic environment made this report a mess. It won’t divert the Fed from its current path, but any rate decision will be more focused on the data over the next several months.”

As shown in the LPL Chart of the Day, job gains have been generally slowing since July but we do expect the pattern to stabilize from here. An eventual lift in the participation rate may lead to average job gains in excess of 300,000 per month in 2022.

View enlarged chart.

With inflation still elevated, even if it is expected to peak soon, and the unemployment rate at a level that’s hard not to call full employment, the case for rate hikes this year is clear. How many will depend on the path of inflation, contributions to inflation from components that tend to be more persistent (housing, expectations, wages), and how much potential there is for a rising participation rate to loosen an at least temporarily tight job market.

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