Jobs Report Suggests Continued Strength

Stocks fell at the open in response to the latest jobs report (see below). Currently, the Dow is down 50 points and the S&P 500 is down .4%. Bonds are selling off as well. The iShares 20+ Year Treasury Bond ETF (TLT) is down .4%, and the iShares Investment Grade Corporate Bond ETF (LQD) is down .3%.

Data from the Bureau of Labor Statistics confirmed unexpected strength in the labor market last month. Investor’s immediate reaction suggests this will make it harder for the Federal Reserve to bring inflation down. The economy generated 263,000 net new jobs in November whereas economists anticipated something closer to 200,000. In addition, October payrolls were revised slightly higher. The unemployment held steady at 3.7% and the under-employment rate fell to 6.7%–both historically very low. What’s more, the labor force participation rate ticked down to 62.1%. So in an environment characterized by a shortage of labor, we still can’t seem to attract more workers into the labor force. Given this shortage of labor, wage growth remained high last month, reversing prior declines and accelerating to 5.1%. The good news is that the economy remains resilient in the face of tightening financial conditions. The bad news is that Fed officials may take this as a signal to raise interest rates further. And we all know that rising interest rate expectations equals lower stock & bond prices.

And yet, there is a growing body of evidence that companies are tightening the reins on hiring and compensation. A survey of employers by Challenger, Gray & Christmas revealed a spike in layoff announcements. Last month’s tally of nearly 77,000 doubles the prior month level. Layoffs have steadily increased since August, but are still nowhere near crisis levels. Anecdotally, we’re hearing more CEOs talk about hiring freezes or limited layoffs. Further, Goldman Sachs just cut annual bonuses by 10% and Bloomberg reports other investment banks—Citigroup, JP Morgan, Bank of America—are considering bigger cuts. I think it’s safe to say the labor market is cooling, just very gradually.