Job growth is likely to have slowed in December, but not enough to slow the Fed’s rate hikes

The economy is expected to have added 200,000 jobs in December, down from November but still strong enough to allow the Federal Reserve to continue tightening aggressively to fight inflation.

Economists polled by Dow Jones also expect the unemployment rate to remain at 3.7% in December, while average hourly wage growth slowed to 0.4% from 0.6% in November. 263,000 jobs were added in November.

The jobs report is due out Friday at 8:30am ET and will be the last major monthly jobs data before the Fed meets on Jan. 31 and Feb. 1.

The data is important as the Fed has attempted to rein in the hot labor market in its fight against inflation. The central bank has hiked interest rates seven times in this tightening cycle, and economists say they could rise another half a percentage point in February, but futures traders are betting on a hike of just a quarter point.

“I still think we have a solid number in store for us on Friday. I don’t think things have slowed down all that much,” said Michael Gapen, chief US economist at Bank of America.

Gapen estimates that 215,000 new jobs have been added in the past month. “That’s twice as much job growth as they want.” December’s report could still show some gains from seasonal hiring.

The Fed’s latest economic forecast shows that unemployment will rise to 4.6% by the fourth quarter. “Your forecast is based on a rising unemployment rate. We know the breakeven point is somewhere between 70,000 and 100,000,” Gapen said. “If the unemployment rate is going to rise, jobs need to fall below 70,000 to 100,000.”

Gapen thinks the monthly numbers could start turning negative in the first half of the year and then stay negative for a while.

“Right now we’re looking at the underlying economy for evidence of whether the slowdown has spread beyond residential and non-residential construction,” he said. “The next likely place should be on the commodity side of the economy.”

The Fed is poised to weaken the job market because officials see worse damage to the economy by allowing inflation to stay high, Gapen said. He sees construction as an area that could shed jobs as the real estate slowdown impacts the economy.

“We have a large number of houses under construction. … We’re going to be looking for mortgage lenders and real estate agents … people who are frame builders and layoffs. That’s where you’ll probably see construction layoffs first,” he said.

Aneta Markowska, chief financial economist at Jefferies, expects 175,000 jobs to have been added, but she is most concerned about continued pressure on wages. She agrees with the consensus that wages rose 0.4%, or 5% yoy, in December, but says that figure could rise to as much as 0.7% monthly in January if companies make wage increases.

Economists fear that wage inflation, if it spirals, is a type of inflation that is more difficult to eradicate. The strength of the labor economy has surprised economists for months. For example, almost 10.5 million job vacancies were reported in November, more than expected when the vacancies and layoffs survey was released on Wednesday.

“I think the JOLTs data told us that there is indeed a slowdown in hiring. This is not because the demand for labor is falling rapidly,” said Markowska. “It’s just that the supply shortages are starting to take hold. You see the churn rate rising again. Growth attitudes are still solid… We may see more binding labor market tightening, and if that’s the case, we expect more upside in wages.”

Diane Swonk, chief economist at KPMG, said one area that has shown a surge in hiring is new companies.

“A lot of what we’re seeing is being driven on the demand side, not just by employers, but also by new business startups that they suddenly have to compete with,” she said. “It’s a very different situation than we’ve seen in the past.”

The Fed has hiked rates seven times since last March and the fed funds rate is now between 4.25% and 4.5%. Both Gapen and Markowska said the strength of the labor force is prompting the central bank to hike rates another half a percentage point on February 1 and then a quarter point in March. However, many investors expect only a quarter-point rise in February and another quarter-point thereafter.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed is trying to encourage investors to expect higher rates for longer. This emerges from the minutes of the December meeting published on Wednesday.

“I think they’re trying to keep the markets from thinking rates are going to go down quickly this year,” he said. “If you look at market expectations, the Fed Funds Rate will go up to 5% before long and then quickly fall back at the end of the year. The message in the minutes is that interest rates will be higher for longer. Who knows at the end of the day if they’re going to keep interest rates this high for long, but that’s the message they wanted to send.”

Zandi expects the economy added 225,000 jobs in December.

“The job market is slowing steadily, but surely. That is not enough. I think the Fed would like to see job growth south of 100k, closer to zero, to push unemployment north and wages south. Those numbers suggest we’re going to be moving in that direction quickly,” he said. “I think we’re going to be at 100,000 in the spring and there’s going to be zero months in the spring or summer.”

The jobs report could move markets due to its potential impact on the Fed.

“I would primarily look at wages. If 250,000 or 300,000 jobs are added, I don’t think the market will react too much,” said Michael Schumacher, head of macro strategy at Wells Fargo. “If the pay side is 0.5 or 0.6, that’s pretty disruptive. 0.3 is not an event. It takes the market 0.2 to move strongly and then the narrative that the Fed is almost done kicks in.”