Employment Hurts Rates

This week was jam-packed with economic reports despite being shortened on Thursday due to the funeral of President Jimmy Carter.  

• On Tuesday, we received Job Openings and Labor Turnovers (JOLTS) for November along with the Institute for Supply Management (ISM) Services report.  
• The Federal Reserve (Fed) previous meeting Minutes were released on Wednesday along with the important December ADP private-sector employment report.  
• Friday brought the Bureau of Labor Statistics (BLS) December Jobs report.  

JOLTS: More Job Openings, Lower Quit and Hire Rates

JOLTS showed that job openings were 8.098M for November, one month behind other employment reports. This was the highest level since May 2024. 

We need to remember that this number in the post-Covid/Work-From-Home era is not as accurate as in past years. Employers can post the same job in multiple locations if it allows for remote work. This can skew the results. 

Diving a little deeper into the report, we saw that the Quit Rate declined from 2.1% to 1.9%. This is important because it means that fewer people think they could get a better job. The Hiring Rate fell from 3.4% to 3.3%, the lowest since 2013, excluding Covid. The Fed has acknowledged that they track these metrics when considering the health of the job market.     

ISM Services Report: A Mixed Bag

The Institute for Supply Management (ISM) Services Report showed a rise in this sector from 52.1% to 54.1%, which was stronger than expected. This expectation miss caused bonds and rates to worsen. This report wasn’t all roses. 

The ISM surveys 18 major industries. Their November report showed growth in 14 of the 18, but this month’s report showed growth in only 9. Six (6) of them said their business is contracting compared to the previous three months. 

Some of the strength in this report may be due to orders being placed earlier than normal due to possible tariffs that could impact the supply chain.  

Fed Minutes: Potential Rate Cut Slow-Down

The Fed’s Minutes from their December meeting showed a definite expectation of slowing rate cuts. 

“Almost all participants judged that upside risks to the inflation outlook had increased.”  

They seem to be concerned about the effects of the new administration’s trade and immigration policies. The voting members feel that the market is close to the Neutral Rate. This is the important market rate which means that monetary policy is not restrictive nor accommodative.  

ADP Private-Sector Report: Good News for Inflation

ADP is one of the largest payroll companies in the country. It processes payroll for much of the private (non-government) sector. ADP is uniquely positioned to have insight into what is occurring in the labor markets. Their December report showed 122,000 jobs created, which was weaker than the 140,000 expected. 

• Most of the jobs came from businesses with more than 500 employees. 
• A large portion of the job gains are coming from the services industry and specifically healthcare. 
• One positive aspect of this report for rates and bonds was that wage growth was shown to be slowing. This is good news for inflation and something the Fed monitors closely.

BLS Jobs Report: 

This brings us to Friday and the BLS Jobs report for December. As we discuss with each of these reports, the BLS Jobs Report has two components: The Business Survey, or the headline number, and the Household Survey, which creates the unemployment report.  

BLS Business Survey

The Business Survey showed December employment increased by 256,000 jobs versus estimates of 160,000. This sounds like a major miss, but we need to remember that this number incorporates Seasonal Adjustments. 

If we look at the non-seasonally adjusted numbers, there was an actual low of 81,000 jobs. This is a little abnormal if the losses were from retailers from holiday seasonal employment. Usually, those jobs remain until January and are reflected in the January numbers. 

This was one of the few times that the Birth/Death Model was not influential. As we have seen from the quarterly QCEW reports, the BLS usually overstates jobs by around 40%. It will be interesting to see if that trend continues this year.  

BLS Household Survey

Surprisingly, the consistent weakness in the Household Survey appears to have stopped with the December report. The Household Survey showed 478,000 job gains. This resulted in the unemployment rate falling from 4.2% to 4.1%. Digging deeper, we can see two points of weakness, however. 

First, the length of time people remained on unemployment continued to extend. Once someone is let go from a job, it is harder to find a new job.  

Secondly, the majority of jobs – 359,000 of them – were from individuals under 24 years old, with 224,000 coming from the 16- to 19-year-old segment. As would be expected, most of those jobs are part-time, seasonal, and low paying, while the individual is still in school. 

The prime working ages didn’t show gains. Out of the gains we also saw that only 87,000 were full-time jobs while 247,000 were part time. 

Looking Ahead

Next week is another Inflation Week:

Tuesday, January 14: Producer Price Index (PPI – Wholesale inflation)

Wednesday, January 15: Consumer Price Index (CPI – Consumer inflation)

Thursday, January 16: Retail Sales, Initial Jobless Claims, NAHB Housing Market Index

Friday, January 17: Housing Starts and Permits

The Bottom Line

Bonds and interest rates were deeply hurt by the employment data this week. It will remain to be seen if the underlying softness in these reports will materialize in the future and provide some relief. Next week will be important to see if inflation remains tame. Also, how were Retail Sales from the holidays? If they were strong, this could also be bad for bonds and rates.