U.S. Non-Farm Payrolls Outlook for January 2024

The U.S. Bureau of Labor Statistics will release the January non-farm payrolls report on February 1, local time. As of today, the market expects non-farm payrolls to fall back to 185,000 in January, down from the previous reading of 216,000.

The Fed announced its first interest rate decision of 2024 on January 31, which was in line with market expectations. It continued to keep the benchmark interest rate unchanged, which is also the fourth consecutive pause in interest rate hikes by the Fed since September 2023.

There are several key points in the FOMC statement, one of which is "the removal of remarks of possible further policy tightening. At the same time, target risks are leveling out and any adjustments to interest rates will be considered, and no rate cuts will be made until the likelihood of inflation reaching 2% increases."

So what does the increased likelihood of achieving 2% inflation mean here? There are many measurements for this, but the return to normal levels of the labor market may be a key one. In his speech, Fed Chairman Jerome Powell said that the labor market is close to normal in many respects, but it has not fully recovered. Gradual regression is an ongoing process. This begs the question: Will there be an unexpected weakness in the labor market that will prompt the Fed to cut interest rates?

The ADP National Employment Report is often seen as a forward-looking report on the NFP. In January, 107,000 new private-sector jobs were created in the US, down sharply from 164,000 and well below the market's previous estimate of 145,000. In terms of specific data, the biggest slowdown was in the services sector, which fell from 155,000 in December to 77,000 in January. The most significant declines were in the leisure and hospitality sector, which fell from 59,000 to 28,000, and the education and health sector, from 42,000 to 17,000. Trade/ transport/ utilities and construction sectors were the main contributors to employment growth, with 23,000 new jobs added to the former and 22,000 new jobs added to the latter. The job creation in the information industry turned from an increase to a negative number, with a decrease of 9,000 people.

Overall, the ADP employment report indicates a marked slowdown in the labor market, continued easing of wage pressures, and a fall to new lows for job changers. The non-farm payroll data to be released by the U.S. Department of Labor may be quite different from the ADP. At present, the market expects non-farm payrolls to increase by 185,000 in January, and the unemployment rate will remain at 3.7%.

We continue to discuss the outlook for non-farm payrolls in January combined with the December non-farm payrolls report. In the non-farm payrolls sub-items in December, several sectors performed exceptionally well.

The number of new jobs in the leisure and hospitality sector was 40,000 in December, up from 12,000 in the previous month. Among them, the growth of the employed population was mainly concentrated in its sub-item accommodation and food services (28,400). However, due to seasonal factors such as the Christmas holiday in December, the leisure and hospitality sector is likely to slow down this month. In the leisure and residence sub-item of the ADP report, the number of new jobs also fell to 28,000.

Taking it a step further, the latest JOLTS job vacancy data showed that the job vacancy rate in the leisure accommodation sector slipped from 10.8% in October to 5.6% in December. The ratio of total departures also stabilized at around 5.7% (previous value of 5.6%). The data shows that as the number of employed people grows, the ratio of people leaving the job has not declined, and the demand for employed people in the industry has become saturated.

The Consumer Price Index (CPI) also corroborates this. As the employed population of the sector grows due to seasonal factors, it does not cause the same rate of inflation to rise in eating out, and even slightly decreases MoM.

From the data above, it can be seen that the employment growth of the leisure accommodation industry does not have the conditions for a strong rebound. Judging from its three historical data (25,000, 12,000, and 40,000), it remains to be seen whether it will continue to maintain signs of rebound. However, the downward trend is confirmed compared to last year. Therefore, it is expected that the industry will not have a bright performance in this non-agricultural performance.

Education and health services added 74,000 jobs last month. Its sub-data: health care and social assistance were the "main force", with 58,900 new jobs. Social assistance created 21,200 new jobs.

Recruitment in the healthcare sector continues to be driven by structural forces such as an aging population and sustainable development. Meanwhile, the supply-side economics of the Biden administration has shifted policy toward the healthcare sector. These factors were also reflected in the December non-farm payrolls report, which was reflected in the rise in employment.

But one thing we need to note is that the performance of the industry has been more volatile if history is any guide. What is clear is that it is indeed in a downtrend at the moment. In addition, healthcare stocks tend to underperform in presidential election years, largely because healthcare costs are often a political issue. Lowering people's medical costs is also reducing the profits of the medical industry in disguise. Coupled with President Trump's recent outperformance of Biden in voter spending rates, this will lead to tightening policies in the industry. This is also evidenced by the breakdown of health care in JOLTS, which showed that the employment rate fell from 3.8% in October and November last year to 3.2% in December, and the number of employees fell by 119,000.

In summary, employment in the education and health services sector should have slowed MoM in January.

The change in the construction was not significant in this ADP employment report. It dropped from 24,000 in December to 23,000 this month, not much of a change.

According to the December non-farm payrolls, construction grew by 17,000, with employment in its subcomponent construction of buildings growing by 12,000, which was the primary cause of the growth in the construction. Residential construction grew by 3,900, a significant increase from the previous value of -2,600; nonresidential construction growth grew by 8,100 (previous value of 9,000).

In contrast to leisure and hospitality & education and health services, construction employment growth is not significant. However, it is important to note that home sales prices and rental prices increased in 2023 compared to 2022, with the median home sales price reaching a record high of US$389,800, while higher prices were accompanied by a decline on the demand side of the equation. The existing home sales in 2023 were 4.09 million, down 19% YoY, the lowest level since 1995.

In addition, judging from the recent data on the monthly rate of contracted sales of existing homes at 8.3% (previously -0.3%), the total number of new home sales at 664,000 (previously 615,000), which is lower than the average since last April, the total number of permits for construction at 1,495,000 (previously 1,467,000), the total number of new home starts at 1,460,000 (previously 1,525,000) on an annualized basis, and the monthly rate of construction expenditures at 0.9% (previously 0.9%), etc., it can be roughly concluded that the emphasis of the housing market has shifted toward existing homes in December, which means that the construction may lose its main driving force. The decrease in sales of new homes will mean a decrease in the number of new home starts, and the related workers will also be reduced. It should be noted that considering the lag between home sales and home construction, the construction industry employment in the non-farm payrolls may not be a big drop, and the greater probability will be reflected in the next non-farm payrolls.

The U.S. economy continued to outpace recessionary expectations in 2023, realizing strong growth. The main contributor to the economy is construction, which rebounded strongly in 2022 and showed unusually strong growth overall in 2023. But as the economy slows, the American Institute of Architects (AIA) expects the construction industry to slow, with growth in nonresidential construction spending slowing to 4% t and 1% by 2025.

Overall, both demand-side and macroeconomic observations will depress economic activity in the construction, which in turn depresses employment growth.

U.S. JOLTS Job Openings hit a recent high in December, rising to 9.026 million, higher than the expected 8.75 million. 1.44 job openings per unemployed worker in December was a significant rebound from November. The number of self-departures was the lowest in nearly three years, suggesting that workers are increasingly sticking to their current jobs and implying that Americans are less confident that they can find other jobs in the current market or get better-paying new jobs.

The words "no change" and "little change" appear a total of 13 times in the non-farm payrolls. Job vacancies remained stable while hiring rates increased slightly. Resignation and layoff rates remained unchanged. As it stands, job growth is still sufficient to keep pace with the growth of the working-age population, and layoffs remain at historically low levels, although hiring rates have slowed over the last year and are below pre-pandemic levels.

Levels of job openings, hiring, and separations are closer to pre-pandemic labor market conditions than they were at the peak of the Great Reshuffle in 2021-2022. The rapid turbulence of the worst period of the COVID-19 pandemic is behind us.

Even though hiring has slowed for much of 2023, hiring rates are still higher than separation rates in every industry, according to the latest data from December.

Overall, the non-farm payrolls highlight that the U.S. labor market remains strong, but not overheated. It has slowed down compared to the past, but the slowdown has been a bit bumpy.

Both the ADP employment report and the upcoming non-farm payrolls show a decline in employment. In addition to the above factors, the number of non-farm payrolls has risen for three consecutive months, in which the growth rate of 216,000 people is at a relatively high level, and the probability of going from up to down is higher.

However, the significant adjustment of the interest rate meeting statement shows that the Fed's monetary policy stance has been adjusted, which basically determines the end of this interest rate hike cycle. However, ending the interest rate hike does not mean the beginning of an interest rate cut, and we still need to wait until inflation decreases steadily and consistently to determine the timing of interest rate cuts.

Inflation and the labor market are inextricably linked to the degree of tension, and the employed population is the basic guarantee of the labor market, it is expected that leisure and hospitality, education and health services, and construction may slow down, resulting in non-farm payrolls lower than expected, but far from the extent of the weakness, and will not advance the pace of the Fed's interest rate cuts. Overall, the labor market is still somewhat resilient but will put pressure on the Fed in the timing of rate cuts.

Additionally, there is another risk point to keep in mind with this non-farm payroll:

In the reporter's Q&A session, Powell made it clear that the labor market has reached or approached the normal level in many aspects, and it is only a matter of time before it gradually returns to normal. If the labor market slows down, the Fed will cut interest rates early. In other words, the weakness in one single non-farm payrolls may not be enough for the Fed to cut interest rates in March. After all, there is only one non-farm payroll (non-farm payroll in February) before the March meeting, which is not enough for the Fed to conclude that the labor market is slowing at an accelerating pace.

Once the labor market shows enough resilience, it will deepen the concern about wage inflation. Adding to the January meeting, the Fed's suppression of the market's radical expectations made the market conservative, which may further cool down the interest rate cut expectations.

That said, purely from a risk perspective, there is more risk of the USD rising than falling.