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US NFP expected to show slowing growth

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Net job creation in the US has been coming down since the middle of last year. Through that time, analysts have consistently underestimated the number of people getting hired each month. Now, the consensus for January is for 185K, lower than the 223K reported in December. Typically, January has weaker jobs performance due to the end of holiday hiring, and corporate account readjustment.

Normally, around 200K jobs added is considered a good result. But the US jobs market remains substantially lopsided, and has not balanced out since covid. The labor force participation rate is still well below 2019 levels. This has contributed to extraordinary tightness in the labor market, and helped justify the Fed’s aggressive hiking stance.

Hiding the worrying signs

Several high profile companies announced relatively large job cuts. Though they are concentrated in the tech sector, which has been under increased pressure compared to other industries. But comparably few companies have gone on hiring sprees. The majority of major companies also simply affirmed their capital expenditure programs, meaning that they won’t be looking to substantially expand the workforce in the coming months.

The thing is, the number of job openings still by far outpaces the number of people looking for work. So, even if there is a large reduction in the number of available jobs, it could still leave the unemployment rate unscathed, and even show net job growth in NFP. Effectively, this could hide worrying trends in the labor market, even as the Fed finally signaled that it’s getting near to pausing its hiking.

Where are the jobs?

The latest report from the BLS shows that the number of open jobs increased to 11 million, while the number of people looking for work decreased to 5.8M. The total number of job seekers is at the lowest point since July. This came in the context of still extraordinarily high labor “churn”. That is when people quit a job to take another, usually with better pay or work conditions. That number has exceeded 4M a month pretty consistently all last year.

This opens the question of how it impacts inflation, and Fed policy. Average hourly earnings are expected to grow at an annualized rate of 4.3%, while inflation is at 8.5%. In other words, a small number of people are managing to get higher salaries. But for the majority, they are seeing their purchasing power continue to erode thanks to inflation. As far as monetary policy is concerned, it does keep the Fed from worrying about a wage-price spiral, which would have increased the pressure to raise rates even further.

Is it good news?

The unemployment rate is expected to tick up to 3.6% from 3.5%, which is still well below the structural level. Typically, low unemployment is a good sign. But with a series of reports showing slowing industrial production, and low participation rate, it could be a worrying sign for economic growth. After all, if people aren’t working, they aren’t producing, and production is what is needed to grow the economy and support the currency in the medium to long term.

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