Wall Street Cheers the Latest Jobs Numbers

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Equities rose last week, with the S&P 500 and the NASDAQ each closing at new record highs on Friday. The Dow Jones gave up some of its recent gains, finishing down modestly for the week. The move higher came as employment figures released during the week once again painted a muddled picture of the underlying strength of the job market.

To be sure, last week’s Nonfarm payroll report from the Bureau of Labor Statistics (BLS) showed solid growth with 227,000 new jobs added in November, including 194,000 positions in private industry. The latest figure may be affected by a rebound in hiring following October when hurricanes Helene and Milton led to weak job growth. In order to smooth out the impacts of the hurricanes and labor strikes, we look at three- and six-month trends and see that job creation in the private sector remains positive with gains of 138,000 and 108,000, respectively. The diffusion index (which measures of the portion of the 250 industries covered by the report that added jobs versus those in which employment is unchanged or declining) rose to 56.2 percent but was down from September’s pre-hurricane level of 59.4 percent.

The BLS’s other jobs report, the Household survey, offered a far weaker picture with 355,000 fewer people employed in November than October. The unemployment rate edged higher to 4.246 percent from 4.1 percent the prior month. It’s worth noting that the rise of the unemployment rate came despite an estimated 193,000 people opting out of the job market. Recall that when the unemployment rate hit 4.3 percent in July and triggered the oft-cited Sahm rule (which has been a reliable indicator of coming spikes in the jobless rate), Fed Chair Powell pointed to a rise in labor participation as a benign reason for the uptick. Over the past 12 months, the Household data shows job losses of 725,000; going back to 1955 (with the exception of 1957), every time the 12-month Household number was negative, the economy was in or headed towards a contraction. Additionally, over the past few months we have seen a sharp increase in the number of people who have been unemployed for more than 27 weeks. The number has grown from 1.25 million in April to 1.661 million in November. This sounds another potential warning bell for the labor market given that, historically, increases this large have signaled further economic and labor market weakness.

As we’ve often seen during the past year, the Household survey estimates of positions are materially different than those found in the Nonfarm report. Typically, the Nonfarm data and the Household estimates can vary over short periods of time, but eventually the gap narrows. Given the downward trend in Nonfarm payrolls revisions over the past 18 months, we believe it is likely the final estimates will be directionally more in line with the Household survey.

While the markets have become accustomed to the conflicting messages from various measures, comments by Chair Powell last week highlighted how the disjointed data can lead to the Fed acting on imperfect information. In an interview, the chairman acknowledged that the job market was stronger than originally thought when the Federal Open Markets Committee voted to cut rates by 50 basis points, in part because of a softening employment picture. Given the seemingly strong employment picture, along with signs of solid economic growth and inflation that has shown more resiliency than previously expected, Powell said the Fed didn’t need to rush to make future cuts: “The good news is that we can afford to be a little more cautious as we try to find neutral.”

However, barring a surprise spike in this week’s Consumer Price Index (CPI) release, we believe the Fed will take heed of the continued slowing signs of the labor market and cut rates in December. As we push into 2025, the Fed will continue on a data-dependent and reactive stance in making rate decisions. Given the muddy nature of jobs data, the Fed faces a difficult task as it tries to balance between cutting too aggressively and risking a reawakening of elevated inflation, all the while being mindful that if it cuts too slowly, it could cause additional pockets of weakness in the economy.

Given this uncertainty, we continue to believe investors should follow a plan that accounts for inevitable twists and turns. We believe the best approach to an unknowable economic outcome is diversification. And while diversification is often viewed as a defensive tool, we believe it should be considered an all-weather approach that allows investors to have exposure to asset classes that may perform well even as others lag.

Wall Street wrap

Data from the BLS last week captured the headlines, but other reports reinforced the view of a bifurcated and messy economy.

More on the employment picture: Announced job cuts in November totaled 57,727, up 26.8 percent from the same month a year ago according to the latest report from Challenger, Gray & Christmas Outplacement Services. This marks the eighth month this year that announced job cuts were higher compared to the same month in 2023. In total, more than 722,500 job cuts have been announced, which, with the exception of the COVID year of 2020, is the highest year-to-date total level since 2009. The year-over-year jump in cuts comes as the number of announced new hires year to date is now at the lowest level since 2015 as recorded by the outplacement firm since the report’s inception in 2005. The latest data shows companies have announced plans to hire 761,954 people this year.

More than one-third of the cuts announced last month were attributed to market and economic conditions. For the year, just shy of 148,000 job cuts were part of cost-cutting measures, while another 132,467 were blamed on the market and economic conditions. The number of cuts made for cost-cutting and economic reasons fits with several economic surveys we follow that show many businesses are experiencing still-elevated input costs at a time when they lack pricing power, and many consumers are opting for less expensive options when making purchases.

Manufacturing weakness continues: The latest headline reading from the Institute for Supply Management (ISM) shows that manufacturing activity remains weak, with November’s measure at 48.4, up 1.9 points from October but still at contractionary levels (readings below 50 indicate contraction for the sector). The latest level marks the eighth consecutive month of contractionary readings and the 24th time in the past 25 months that the reading has been below 50. Readings for new orders improved and are now showing some tepid growth with a reading of 50.4, up from the prior reading of 47.1. Order backlogs fell further into contractionary territory to 41.8 compared to 42.3 for the prior month.

The employment index continues to signal shrinking payrolls, albeit at a slower pace. The latest reading of the employment index came in at 48.1, up 3.7 points from October. Weak demand for employees was widespread, with 10 of 18 industries reporting a decrease in employment and only one of the six major industries (food, beverage and tobacco products) reporting an increase. According to the report, companies taking part in the survey continue to pare payrolls through layoffs, attrition and hiring freezes. The relative balance in the employment picture for manufacturers is reflected in the approximately 1:1.5 ratio of hiring versus staff reduction comments, compared to a 1:3 ratio the previous month, meaning less workforce reduction activity.

The pace of increased input costs eased but is still rising, with the latest reading coming in at 50.4, down from 54.8 in October. This measure has been volatile during the past several months. As such, it is too early to tell if the slowing of price increases is the beginning of a trend or simply statistical noise.

Growth in the services sector slows: The latest headline reading from the ISM shows activity in the services sector came in at 52.1 for November, down 3.9 points from October’s reading. While lower than the prior month, growth was solid, with 14 of 18 industries covered by the survey reporting an uptick in activity and 13 reporting an increase in new orders. Overall, new orders came in at 53.7, down from October’s reading of 57.4 reading but still comfortably in expansion territory. New orders have trended down since September’s reading of 59.4 but are consistent with the pace of growth we saw throughout the summer.

Prices paid by companies increased for the 90th consecutive month. The prices index came in at 58.2 percent, little changed from October’s level. In total, 14 industries reported higher costs, unchanged from October. Only one industry (agriculture, forestry, fishing and hunting) reported lower costs. The reading for input prices is consistent with a range that has largely been in place since last year. The consistency suggests that services, where inflation has been most stubborn in both CPI and Personal Consumption Expenditures PCE readings, may continue to hover above the Federal Reserve’s target.

Demand for workers grew, with the employment index coming in at 51.5, down from October’s reading of 53. For much of the year, the employment index has pointed to shrinking payrolls; however, the latest reading marks the fourth time in five months in expansion territory.

Beige Book suggests modest uptick for economy: The latest release of the Federal Reserve’s Beige Book, which provides real-time anecdotal assessments of business conditions across the country, showed the pace of the economy improved modestly from the prior reading, with three districts reporting modest or moderate growth that was enough to offset flat or declining activity in two other regions. While improvements in activity were modest, businesses in most regions sounded an optimistic tone toward increased demand in the coming months.

It's worth noting that the latest report marks a divergence from the past two reports. Indeed, the September report described growth as flat or declining, which we believe contributed to the Federal Reserve’s decision to cut rates by 50 basis points as opposed to a more incremental approach of 25 basis points.

Most districts reported modest price growth. The increase in input costs generally outpaced the ability of businesses to raise prices charged to customers. This was true for both consumer- and business-oriented contacts within the districts. Contacts in the districts expect the current pace of price growth to persist, but businesses in several districts noted tariffs pose a significant upside risk to inflation.

The inability of businesses to pass along higher costs resulted in declining profit margins.  Should this continue, businesses may opt to cut payrolls (one input they can most directly control) to restore margins going forward.

The latest report showed flat or slight increases in employment, with more than half of the districts reporting slight or modest growth in hiring. The tepid growth in hiring reflected little turnover and a low level of layoffs. With employment steady, most districts reported that the pace of wage growth has eased as did expectations for wage pressures going forward. However, hiring and wages were expected to grow significantly for entry-level positions and skilled trades through 2025.

Consumer sentiment rises: Consumer sentiment climbed to 74 in December, up 2.2 points from November’s final reading and now at the highest level in seven months, according to the latest consumer sentiment survey released by the University of Michigan. Views of current economic conditions soared to 77.7 from October’s level of 63.9. The 13.8-point surge in optimism about current conditions was driven by a jump in those who believe that this is a good time to make purchases of big-ticket durable good items. It’s important to note that this perception was based on a defensive mentality. In comments released with the report, Surveys of Consumers Director Joanne Hsu wrote, “Rather than a sign of strength, this rise in durables was primarily due to a perception that purchasing durables now would enable buyers to avoid future price increases.”

Indeed, nearly 20 percent of respondents brought up tariffs in their comments during the survey. Should consumers begin to “buy ahead” of expected price hikes due to tariffs, it could translate to either an uptick in inflation as demand surges or a pulling forward of demand that will then be followed by a slump in future sales.

The week ahead

Tuesday: The National Federation of Independent Businesses Small Business Optimism Index readings for November will be out prior to the opening bell. Last month showed an easing in the level of pessimism but still heightened uncertainty. We will watch to see if optimism continues to improve and if business owners have a clearer view about the direction of the economy in the months ahead.

Wednesday: The Consumer Price Index report from the BLS will be the big report for the week. Recent data has shown core inflation readings remain elevated even as headline readings have come down. We will be dissecting the data to see if core prices are showing any signs of budging.

Thursday: The latest readings from the BLS on its Producer Price Index will offer a look at changes in costs for buyers of finished goods for November. We will be watching to see if input costs continue to creep higher, which could put pressure on profit margins or slow the pace of disinflation.

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