A Potential Win for the Federal Reserve, Higher Unemployment

by Wall Street Rebel - Michael London | 12/02/2022 8:32 AM
A Potential Win for the Federal Reserve, Higher Unemployment

In November’s Jobs Report, employment growth is projected to slow due to the cumulative effect of rising interest rates. There have been increased corporate layoffs and hiring freezes, leading economists to forecast another month of sluggish employment growth.

 

Market watchers have predicted for months that the U.S. job market would succumb to rising interest rates as the Federal Reserve fights to bring down inflation. That didn’t happen during the summer and into early fall when happy consumers drove spending with disposable income to spare.

On Friday morning, we will find out whether things are finally beginning to turn around when the November employment report is announced..

Using data from 10 million employees, Payroll provider ADP estimates the Labor Department’s monthly employment numbers. Based on this estimate, ADP concluded that private employers added a meager 127,000 jobs in November, the fewest since the two months of job losses in late 2020 and early 2021.

ADP said on Wednesday that the sharp declines in manufacturing and professional and business services were more than offset by another month of strong growth in leisure and hospitality, a sector that still has not returned to its pre-epidemic strength.

October saw an increase of 261,000 jobs, according to the Labor Department. When the data is due in November, economists expect the rate to have dropped to about 200 thousand. These numbers will include government workers, unlike ADPs. That’s a significant drop from the average of 347,000 in the previous six months and about twice as many as the economy needs to absorb those who are just entering the labor for the first time.

The Federal Reserve policymakers have been holding out hope that their pursuit of higher interest rates may chill the economy by reducing job growth without causing mass layoffs. If the figure comes in lower than expected, this would be excellent news for those officials. After reaching record highs earlier in the year, both the number of job opportunities and the percentage of employees departing their positions have been gradually decreasing since then, while initial claims for unemployment insurance have stayed at a low level.

Other evidence has pointed to the fact that a more severe contraction is now occurring. The outplacement agency Challenger, Gray & Christmas observed a quadrupling of layoffs last month compared to the same month a year earlier. Most of these layoffs occurred at technological businesses, whose expansion had been supported by an era of cheap financing. The purchasing managers’ index for the manufacturing sector went negative for the first time since the pandemic. This indicator reflects the percentage of firms that are growing their operations.

On the other hand, firms are anticipated to catch up with the demand they weren’t able to satisfy because they were short-staffed, which should keep job losses to a minimum.

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The stock market remained relatively calm on Friday as investors anticipated the release of the November employment report for the United States. Wall Street relies heavily on this report to determine how much farther the Federal Reserve has to go to get inflation under control.

Futures contracts on the S&P 500 index were flat at the close of trade on Sunday, and early Monday trading showed no change from that point.

The S&P 500 saw its first consecutive monthly increase since the middle of 2021 when it increased by more than 5 percent in November and about 8 percent in October. But the benchmark index has been steadily climbing in recent weeks, recovering from a staggering loss earlier this year, as investors anticipate a slowdown in the Fed’s campaign to raise interest rates. This is due to the fact that investors are anticipating a slowdown in the pace of economic growth.

This shift in perspective has also been reflected in the market for government bonds, which has seen a significant decline in rates over the last several weeks. The two-year note of the United States Treasury, connected to expectations surrounding the Fed’s interest rate changes, traded at about 4.2 percent, while the 10-year note traded with very little change at 3.5 percent.

Wall Street is paying careful attention to the economic statistics as well as the public pronouncements made by central bankers as it attempts to predict what could happen next. The job market is doing well despite the fact that certain statistics, such as the October Consumer Price Index report, have indicated that the Federal Reserve has made headway in managing inflation.

The most recent results from the Job Vacancies and Labor Turnover Survey were released on Wednesday. These results indicated that the number of job openings remained high in October, despite the number of available jobs decreasing throughout the month. Importantly, there was no change in the number of people who lost their jobs over the month.

Fed Chair Jerome H. Powell, who was speaking at an event on Wednesday about the labor market, stated that there were “only tentative signs” that the labor market was moderating and that wage growth remained rapid, both of which posed challenges for the Fed, which is attempting to cool the economy to bring stubbornly high inflation under control. Powell was speaking about the labor market. Mr. Powell said that while there have been some positive improvements, there is still a significant distance to go before the prices become stable again.

Mr. Powell also said that a slowdown in the Fed’s pace of interest rate rises would be conceivable as early as its meeting this month, which led markets to spike higher immediately after his statement.

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                      Jerome Powell on wages, unemployment and inflation

 

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