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Upon Further Review – The Labor Market Is Cooling

On Friday (January 5th), once again, the Non-Farm Payroll (NFP) number (+216K) handily beat the +175K consensus estimate for December. Immediately after the release, equity markets, via the S&P 500, spiked +0.75% (35 points) to 4,721 from 4,686, as did bond yields with the 10-Year Treasury rising 8 basis points to 4.08%. But, by day’s end, markets came to the conclusion that the initial labor market reading masked the emerging underlying weakness, and equities closed the day with a minor +8.5 point gain (S&P 500) to 4,697. As for bonds, the 10-Year Treasury had quite a volatile ride, spiking to 4.08% as noted above, then falling as low as 3.96% (mid-day) before finally closing at the 4.05% level.

As noted, the headline NFP number looked “hot,” but that’s where the good news ended:

  • Yet another set of downward revisions (-71K) to October and November resulted in a net change in payrolls of +145K, and removing the uncounted add-on from the now infamous Birth/Death model (+92K) leaves the net NFP number at just +53K.
  • The sister survey, the Household Survey (HS), showed the exact opposite of the NFP report, falling -683K for the month of December (and negative in two of the last three months).
  • Worse, the HS showed a fall in full-time employment of -1.5 million. This means that +817 part-time jobs were created. As noted in past blogs, BLS counts full-time and part-time as equal. The fact that many people, unable to find full-time employment, resort to holding multiple jobs should be a sign that full-time and part-time are not the same. As shown on the chart below, multiple job holders have set new highs in each month of Q4.

Multiple Job Holders

  • The U3 (3.7%) and U6 (7.1%) unemployment rates are calculated via the HS. According to economist David Rosenberg, with a loss of -683K jobs in the HS in December, the only way the U3 unemployment rate retained its 3.7% level and did not rise was that the employment/population ratio fell. That means that fewer people were working in December than in the prior month. How does that fit into the concept of a strong labor market?
  • The more comprehensive U6 unemployment measure, which includes those working part-time but wanting full-time employment, rose to 7.1% from 7.0% in November. This is a sign of a weakening labor market.
  • When one looks at where the job growth occurred (see chart below), +111K came from Health Care and Social Assistance, and Government, two sectors that have little relationship to the cyclical economy. The bulk of the economy, then, added +105K jobs (+65K excluding Leisure/Hospitality). Again, referring to the chart, the sum of the 10 sectors beginning with Retail trade amounted to a mere +52K. That number, along with the fall in full-time jobs, better describes the plight of the labor market. In two words: “Quite Weak!”
  • Another indicator of labor market weakness is the fall in the workweek from 34.4 hours to 34.3. It appears that, after the tight labor markets we saw last year, employers appear to be reluctant to layoff, first reverting to a shorter workweek and less overtime.

December jobs one-month net change

  • In past blogs, we’ve talked about the decline in employment in the “temporary help” industry, and how the labor market can’t be that “hot” when the headhunters are losing their jobs. The chart shows the nearly -10% decline in headhunting jobs in 2023.

Temporary Help Services YoY%


  • The JOLTS (Job Openings and Labor Turnover Survey), which came out on Wednesday, turned out to be a precursor of Friday’s NFP report. Note in the chart the clear downtrend in job openings and the rapid decline in hires which now are at the levels of the early 2000s.

Total US Job Openings & Hires


Once again, it appears that the labor markets have moved toward balance. If they can maintain their current characteristics, then, perhaps, a soft landing for the economy might be achieved. Unfortunately, we live in a cyclical world where downtrends don’t magically flatline at labor market balance!


Besides the labor market, other aspects of the economy continue to have issues. Housing is one of them. New and Existing Home Sales have sagged because mortgage rates spiked. As a result, no one is buying. The right-hand side of the next chart shows the rapid fall in mortgage loan applications since the Fed began raising rates. The left-hand side shows the rapid decline in Existing Home Sales.

US Existing Home Sales & Mortgage Loan Applications Index


Unfortunately, there is more to this story. Not only are new mortgage loan rates a huge issue, but a majority of existing homeowners have mortgage rates under 4%, so selling isn’t attractive unless there is an underlying economic reason, like a new job in a different city. And with such a sclerotic market, it isn’t any wonder why home prices have been sticky to the upside. As the Fed moves rates down in 2024, we expect mortgage rates to fall, which will bring existing home supply to the market. And, with more homes for sale, competition should stop, if not reverse, home price appreciation.


After a stunning up-move the last two months of 2023 (the “Santa Claus” Rally), the first week in January showed some giveback. The S&P 500 peaked on December 28th at 4,783.35, up 16.2% from its 4,117.37 relative low on October 27th. Some “give-back” would seem to be in the normal course of events.

SPX Index


It was a similar week in the fixed-income markets. The 10-Year Treasury yield, which peaked at 5.00% on October 18th, fell all the way down to 3.79% on December 26th. Markets often anticipate the Fed’s move and the direction of interest rates, and, in this case, correctly so. That is, it is fairly certain that the Fed will be lowering rates in 2024 – this even shows up in their latest dot-plot. The timing and magnitude, however, remain unknown. Like the equity market last week, bonds gave-back a little yield, with the 10-Year closing at 4.05% on Friday (January 5th)(see chart below).

Mortgage rates are closely tied to the 10-Year Treasury yield. After rising to as high as 8% last fall, they closed the year at 6.99%. Like the 10-Year yield, they, too gave back a little of the gain, closing at 7.09% on Thursday (January 4th).

10-Year Treasury Rate


Final Thoughts

After analysis, the jobs report was quite weak. The +216K headline NFP number doesn’t square with the HS’s -683K and a loss of -1.5 million full-time jobs. Labor markets have loosened, and, in our view, have a rocky near-term future.

It will take lower interest rates to loosen up the housing market. As long as mortgage rates stay high, the housing market will remain sclerotic. However, we do foresee this market beginning to ease as 2024 progresses. The pace of such ease will be dictated by the Fed.

The “Santa Claus” rally ended when the new year rang in. Both stock and fixed-income markets backed up in January’s initial week. Equities haven’t had a significant correction in over a year, so some backup is normal. If, however, the economic slowdown turns into a Recession, we could see a more dramatic pullback.

During economic slowdowns, bonds always have more fun.

(Joshua Barone and Eugene Hoover contributed to this blog)


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