THE EMPLOYMENT SITUATION — DECEMBER 2021
Total nonfarm payroll employment rose by 199,000 in December, and the unemployment rate declined to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in leisure and hospitality, in professional and business services, in manufacturing, in construction, and in transportation and warehousing. (…)
Job growth averaged 537,000 per month in 2021.
The labor force participation rate was unchanged at 61.9 percent in December but remains 1.5 percentage points lower than in February 2020.
In December, average hourly earnings for all employees on private nonfarm payrolls increased by 19 cents to $31.31. Over the past 12 months, average hourly earnings have increased by 4.7 percent. (…)
The change in total nonfarm payroll employment for October was revised up by 102,000, from +546,000 to +648,000, and the change for November was revised up by 39,000, from +210,000 to +249,000. With these revisions, employment in October and November combined is 141,000 higher than previously reported.
Consensus was +444k. With the revisions, we have 340k more jobs in December.
Euro-Area Inflation Unexpectedly Hits Record in Test for ECB
Consumer prices jumped 5% from a year earlier in December — faster than the previous month’s 4.9% gain and more than the 4.8% median estimate in a Bloomberg survey of economists. A measure that strips out volatile components such as food and energy came in at 2.6%, matching November’s reading.
- Fed’s Bullard Eyes Three Rate Rises This Year, Says Fed Must Defend Inflation Credibility
- Rising Inflation Expectations, Hawkish Fed Prompted Larger Bank of Mexico Rate Increase, Minutes Show
Rising Wages and Increased Hiring Two Years Into the COVID-19 Pandemic
For the past few years, the Richmond Fed has collected information from businesses on hiring plans and changes in wages to recruit and retain workers. The results from the 2021 survey indicate that a much larger share of businesses plan to increase employment compared to recent years, both because they expect strong sales and because their current workforce is overworked. Additionally, this year, a larger share of firms reported raising wages across the board to attract new workers.
According to results from the November 2021 survey, more than half of Fifth District responding firms (56 percent) planned to increase employment in the next 12 months — the highest share in recent years and a significant increase from last year when only 34 percent of firms indicated that they would increase employment. The only other year when more than half of firms said they planned to increase employment was in 2017 when 53 percent expected to add staff. (…)
Firms in our monthly business surveys have been reporting strong demand for workers and difficulties filling open positions for several months. The primary challenge firms [57%] had filling open positions was a lack of qualified applicants. (…) The second most selected issue in the 2021 survey was that applicants rejected job offers because the compensation was too low [23%].
(…) The percentage of firms that are raising starting wages for most job categories doubled from 30 percent in 2020 to 61 percent in 2021. Only seven percent of firms in 2021 indicated that they are not raising starting wages for any job category compared to 27 percent in 2020.
Firms also indicated that the hardest-to-fill job openings are the ones with the fewest educational requirements. Almost three in four firms with difficulty hiring cited it was especially hard finding workers for jobs that require a high school degree or less.
In case you missed the irony:
- 57% of surveyed firms could not find qualified applicants.
- Nearly 75% of firms with difficulty hiring cited it was especially hard finding workers for jobs that require a high school degree or less, i.e less qualified workers.
- 23% of firms said the candidates rejected the job offered because the compensation was too low.
How Companies Are Retooling Supply Chains to Ease Bottlenecks The Covid pandemic has strained global supply chains, causing freight backlogs that have driven up logistics costs. Now, some companies are looking for longer-term solutions to prepare for future supply chain crises, even if those strategies come at a high cost.
Mortgage Rates Hit Highest Levels Since Spring 2020 The increase is driving up the costs associated with home buying at a time when home-sales prices are already near record highs.
RISK DOWN…
The signs of a general de-risking process have been there for a while now:
- At the Jan. 5 close, the average S&P 500 stock is actually down 11% from the 52-week highs!
- In fact, ALL S&P 500 stocks are down from their 52-week highs. The median stock is down 7.5% while 73 (15%) stocks are in a -20%+ bear hug with an additional 123 stocks (25%) in -10%+ correction! That means that 40% of S&P 500 stocks are down 10% or more from their 52-week highs.
- These 196 stocks in correction/bear mode have an average P/E of 36.4x trailing EPS and 58% of those having had an earnings revision in the last month were revised down.
- The Russell 2000 Index has moved sideways in 2021. It is now below its 50, 100 and 200-day moving averages, all of which declining. Trailing P/E: 33.9. Forward P/E: 26.9 assuming profits jump 26%!
- From its February 2021 high, Cathie Wood’s ARKK fund, holding mainly losing companies, is down 46%. Investors are realizing that a story is, eventually, only worth what profits it can actually generates.
- The Renaissance IPO Index is down 32% from its February high.
The IPO pipeline is still overflowing with over apparent 900 unicorns anxious to list. - The De-SPAC ETF is down 51% from its June 2021 high. “The De-SPAC ETF (NYSE: DSPC) is the first exchange traded fund to offer pure-play exposure to private companies that come public as the result of a merger with a Special Purpose Acquisition Company. SPACs are one of the most disruptive structures to hit the U.S. capital markets over the past several years.” Disruptive indeed!
- A vast majority of 2020 and early 2021’s high-flying stocks are down significantly from their respective 52-week highs. (Lance Roberts on December 14)
- Most of the “mob stocks” have come down to earth: AMC is down 67% from its June high, GME -782% from its January high and HOOD, which allocated 25% of its IPO to Robinhood’s users is down 59% from its IPO price and 82% from its August high.
- The BofA US junk bonds yield (CCC and lower) was 6.5% in early July. It’s now 8.0%.
… But it may not be “risk-off” just yet. The largest caps keep pulling the wagon, so far. 
KKR recently published this table showing that “equity returns are generally positive, but below average” during Fed tightening cycles.
The median return of the S&P 500 Index is +3.3% over the last 15 tightening cycles, ranging from -40.1% to +15.4%. I note that the average is 0.4% but it rises to 2.4% when eliminating the two extreme years.
I also note that the high inflation years (10.4% on average) within my red rectangle produced averaged returns of -8.3%. The first 3 tightening cycles had inflation rates of 1.9% on average and returned +8.2%. The last 6 cycles had inflation rates averaging 4.4% and returned +5.3%. The only negative years were high inflation years.
KKR’s strongest argument in favor of a positive year for equities is the still large liquidity overhang from central banks and its favorable view of inflation…in the second half. KKR also sees “a high degree of risk that we have a further commodity spike in 2022. Such an occurrence would dent demand, puncture corporate margins and tighten financial conditions.”
The advice if staying long: increase liquidity and quality.