Jobs Number May Indicate Covid Economy is Over
— Scott B. MacDonald, Ph.D.
Wow! The U.S. economy added 467,000 jobs last month, keeping the unemployment rate in the 4.0% area. Also impressive is that there were large upward revisions from previous months. We say 'wow' because there was such negative sentiment prior to the release of the jobs number. Why? The gloom and doom crowd focused on the impact of Omicron, with the expectation that job creation would be meager (the Bloomberg consensus of economists was at 150,000 jobs). The White House also got the narrative wrong. As a negative factor on the job market, Omicron was a dud.
The main drivers in the jobs number are that companies are short of workers in a number of sectors (in transportation this is especially acute) and are offering better wages. Indeed, competition for workers has led to the "Great Resignation" in which workers quit their lower paid jobs for higher paying ones. At the same time, part of the work force is aging out (as boomers opt to retire). Add to this, official immigration has declined (though unofficial immigration is a totally different issue). But looming over this picture is that corporate America is in good shape — despite Omicron and chip shortages. One item that slipped under the radar lately is that U.S. corporate bankruptcies have fallen to their lowest level in more than 15 years. According to S&P Global, only 6.5% of U.S. firms defaulted in 2020, roughly half that observed during the 2009 high. The rating agency forecasts the default rate among higher-risk companies will remain low at 2.5 percent for the 12 months ending September 2022. Even in the face of rising interest rates, there is considerable capital that still needs to be employed and most asset managers remain in need of yield, which can be offered by high-yield companies. For the employment picture this is good news in that a number of jobs that otherwise would have disappeared, remain. And some of these companies will improve their performance.
The last point is what does the Federal Reserve do in its March 15-16th 2022 meeting? If the central bank remains data-driven, it will raise rates (which we expect). The question then is by how much — 25 bps or 50 bps? There was a major debate about this before the jobs number; now it it has intensified. Considering that prices are on the rise (including those sticky non-core inflation items food and gas prices), the Fed must send a signal that inflation is under control and that it not playing catch-up. If economic data between now and the March FOMC meeting continues to demonstrate strength, the 50 bps option looms larger, which could function like a slamming of the brakes. If nothing else, today's wow jobs report for last month has added to pressure on the Fed not to fumble and ignite a recession.