October Payroll Results, November 4th:
Non-farm payrolls: +261K vs +195K expected (versus 263K in September)
Unemployment rate: 3.7% vs 3.6% expected (versus 3.5% in September)
Average hourly earnings MoM: +0.4% vs +0.3% (versus +0.3% in September)
But what does it all mean? The CPI — or the “Consumer Price Index” gets all the glory when talking about how the Fed is calculating its next move. But U.S. Payrolls data have a powerful effect on the other half of the Fed’s “dual mandate.”
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What is the Fed’s Dual Mandate?
According to Congress, the Fed’s goal should always be, “maximum employment, stable prices, and moderate long-term interest rates.”
But wait: If the Fed’s goal is “maximum employment,” something doesn’t add up. Why, if the Fed wants “maximum employment” would Fed Chair Jerome Powell suggest that “the labor market must soften” during many recent FOMC speeches?
The answer: It isn’t about the jobs, it’s about the “stable prices.”
When Powell says,
“The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.”
He’s saying that there are too many jobs and not enough workers.
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How Many Job Openings Are There Per Worker in America?
There are 1.7 job openings per person who is looking for a job as of October 4th, according to the Bureau of Labor Services. That’s slightly down from March, where the number was 1.9. But in the Fed’s view, it’s still too many. The Fed wants lower job openings, (moderately) higher employment, and a slowing in wage growth.
When Powell says the labor market is “out of balance”, he’s saying that the power balance between employees and employers is skewed toward the employee.
This creates a problem: “wage-flation.”
What is Wage-flation?
Believe it or not, it’s exactly what it sounds like — the inflation of wages. When there are far more job openings than willing workers, businesses are forced to compete for workers by “bidding higher” on employee salaries. This cuts into the margin of businesses, and can in turn lead businesses to pass on costs to the consumer.
It sounds horrible. The common argument against wage-flation is that more available jobs, and the power balance being in favor of employees, is a “good” thing. You might even think, “How greedy of these CEOs! If they would just take a pay cut, instead of increasing the price of their products or services, they could offset the extra amount they’re paying workers!”
However, unfortunately, the discrepancy between the individual wealth of someone like Andy Jassy (the current CEO of Amazon), and the amount of capital currently being spent on employee compensation at Amazon is wider than you would probably think.
For the sake of our example:
Amazon CEO Andy Jassy’s wealth is estimated to be $400 million dollars in October of 2022. Comparatively, the amount that Amazon spends on employee wages each year is in the many-billions — and increasing rapidly (by as much as $1 billion in Q3 alone). Andy Jassy and all of the other C-level Amazon bosses could go broke giving their entire net worth to Amazon workers and it wouldn’t even put a dent in the yearly cost of employment. And that’s Amazon — one of the biggest employers in the world. For small businesses, it’s much harder to shake off these added costs.
The result: Unstable prices as businesses big and small race to keep their head above the water by any means necessary. That’s why, at the end of the day, it isn’t some evil notion that the Fed wants to “soften” the labor market (or in other words: mildly increase the unemployment rate). The Fed wants to see the economy grow, but if it grows too fast in the face of rising inflation, then it could spell trouble down the line as inflation becomes entrenched and takes its toll on the economy, and on everyday Americans.
The Bottom Line: What Does the October Payrolls Data Mean for the Market?
In plain speak, Jerome Powell said that he wants to see unemployment rise modestly to 4%. With unemployment coming in hotter than expected (3.7% vs an expected 3.6%, against 3.5% in September), it looks like the Fed got its wish. On the other hand, wages are still higher than anticipated (+0.4% vs +0.3% against +0.3% in September). Markets aren’t sure how to read the news, with stocks briefly soaring earlier in the day before selling off around noon ET. This is because stocks are searching for a definitive sign that the highly anticipated “Fed pivot” could be on its way.
The “Fed pivot” is another way of saying “the moment when the Fed stops aggressively hiking rates.” While some will be quick to point out that current rates are pound-for-pound lower than they have been throughout history, this has been the fastest pace of rate hikes seen in more than 40 years. The Fed giving the market space to catch its breath could end up being a powerful tail-wind for stocks, especially for the high-growth names hit hardest by rate-related news.