What December’s Jobs Report Says About Sentiment

US economic data have garnered significant attention over the past week, including 2021’s last monthly jobs report, released last Friday. December nonfarm payrolls rose by 199,000 while the headline unemployment rate fell to 3.9%.^[i] Both widely watched figures continued their recent trend of bucking the consensus—in conflicting ways. While the number of jobs added in December was well short of the 400,000 estimated—and below 2021’s average monthly job growth of 537,000—the unemployment rate beat expectations of 4.1%.^[ii] While the numbers themselves are no doubt interesting, what caught our eye most was onlookers’ general reaction to the data. In our view, that is telling about sentiment—illustrating the prevalent mix of skepticism and optimism near perfectly. 

Many blamed the big jobs miss on Omicron. While past variants led to COVID restrictions that temporarily knocked consumer demand and forced some people out of work, Omicron is driving big absenteeism. Millions of workers are calling in sick, impacting industries from airlines and schools to hospitals and garbage collection. Many think the situation is worse than the data show since the jobs report’s cutoff is mid-month and doesn’t capture Omicron’s late-December surge, which has carried over into January.

We don’t dismiss Omicron’s economic headwinds or personal inconveniences, and we won’t be shocked if January’s jobs data show a bigger effect. Perhaps this spills into other, output-related data series, too. But there is a big difference between the economic impact of absenteeism and lockdowns. Consider airlines. United Airlines just announced more than 4% of its workforce tested positive for COVID and the majority isn’t working, forcing the airline to cut flights.^[iii] But delays and cancellations don’t cause travel to cease: Over the past month, the average number of travelers passing through TSA checkpoints per day was about 1.8 million.^[iv] Compare that to the average of 213,153 travelers per day in the month following March 17, 2020—the day when strict shelter-in-place orders started taking effect in California’s Bay Area, followed by similar measures nationwide in subsequent weeks.^[v] Now, TSA checkpoint numbers aren’t seasonally adjusted, so comparing a traditionally busy holiday travel period to a late-winter stretch isn’t apples to apples. But in our view, the raw numbers reveal absenteeism’s challenges are a far cry from lockdowns’.

Beyond Omicron, some pundits have questioned the jobs report’s implications for the Fed. Per the Federal Open Market Committee’s (FOMC) December meeting minutes, monetary officials called labor markets “very tight.” That suggests the US may be nearing “maximum employment,” which Fed officials have cited as a requirement before raising interest rates.

However, maximum employment declarations seem a tad premature given December’s still-low, 61.9% labor force participation rate (the percentage of the population that is either working or actively looking for work).^[vi] Now, this is up from January 2021’s 61.4%, suggesting some workers were lured back to the labor force, perhaps by higher wages. But it remains below pre-pandemic levels, suggesting there are workers on the sidelines who have yet to return. December’s average hourly wages rose 4.7% y/y—slower than November’s 5.1% rate but in line with the quicker growth trend since April 2021.^[vii] Perhaps the higher wages will eventually boost participation more. 

Regardless, many assume the Fed is destined to hike in March thanks to the stronger-than-expected recovery in labor markets, especially since the Q4 2021 unemployment rate of 4.2% was far better than the FOMC’s December 2020 projection of 5.0%. Maybe these labor numbers convince the Fed to hike in March, maybe they don’t. But we don’t think there is any way to predict how central bankers—with their own opinions and interpretations of the data—will vote on what they think is the appropriate course of action. Their minds can also change over the next two months before the next scheduled FOMC meeting. So we suggest, as always, to assess central bankers’ actions, not their words. That so many people think one rate hike is hugely consequential—newsflash, it isn’t—also speaks to the skepticism present today.

In our view, these disparate reactions to the jobs report are the latest evidence of sentiment’s tug of war between optimism and skepticism. Rewind to January 2021, when the December 2020 jobs report came out. The initial release showed nonfarm payrolls fell by -140,000, ending a seven-month growth streak, with restaurants and bars driving the decline due to a variant surge and state-imposed restrictions. But sentiment had also begun perking up. Then, economists argued jobs weakness wasn’t broad-based, and many were optimistic about 2021’s prospects, anticipating a boost from the government’s relief package and unleashed demand thanks to vaccines (both misperceptions, in our view). We saw other signs of optimism and even budding froth, as investment fads grabbed more and more attention. However, early 2021’s pockets of euphoria didn’t spill out broadly, and false fears—e.g., QE’s end, Fed rate hikes, Omicron’s emergence—eliminated the froth and injected more skepticism in the back half of the year.

In our view, 2021 confirms sentiment doesn’t evolve on a smooth, preset path. Broad-based optimism showing signs of nascent euphoria doesn’t mean full-fledged euphoria is next. Moreover, though false fears have some power today, pessimism isn’t rampant. Most experts acknowledge the improvement in the economic data. They aren’t calling it a mirage or warning the economy risks slipping into contraction. While some worry about the speed and quality of growth, most expect it to continue. These reactions aren’t consistent with what we would typically see in a young bull market—which this one is on paper. Young bull markets generally feature a lot more pessimism and negativity than the mix we have today. That mix suggests we are later in this bull market, but not all that near the typically euphoric top.