1️⃣ Background: The Dilemma Posed by Employment Data
Market expectations and concerns are clashing regarding the timing of the Federal Reserve's monetary policy pivot. Despite aggressive interest rate hikes to curb inflation for over a year, the US labor market has remained surprisingly resilient. However, observations suggest that December data might tell a different story. Whether it is a "Goldilocks" scenario where the labor market cools down or the prelude to a sharp economic recession, these December private job indicators are becoming a more critical turning point than ever.
2️⃣ Core Analysis: December Private Jobs and the Fed's Perspective
The Fed is not just looking at the simple increase in the number of jobs. The core lies in the slowing rate of wage growth and changes in the labor participation rate. If private sector employment exceeds expectations in the December data, the Fed gains justification to avoid rushing interest rate cuts. Conversely, if employment contracts sharply, recession fears will dominate the market.
- Easing Wage Pressure: If the average hourly wage growth rate is slowing, it is a positive signal that employment stability can be pursued without fear of recurring inflation.
- The Gap Between Services vs. Manufacturing: It is essential to monitor whether employment contraction in manufacturing is spilling over into the service sector, which would signify a broadening economic slowdown.
- Bad News is Good News?: Paradoxically, a moderate slowdown in employment indicators can be a boon for the market, as it may accelerate the end of the Fed's tightening cycle.
3️⃣ Summary of Key Information
ADP Private Employment Report
The ADP Report, released before the official Department of Labor announcement as a leading indicator, reflects the vitality of private sector employment. If the December figures drop significantly compared to the previous month, it serves as direct evidence that companies are scaling back hiring.
JOLTs (Job Openings and Labor Turnover Survey)
A declining trend in Job Openings suggests that labor demand is shrinking. A key point to watch is whether the ratio of job openings per unemployed person returns to pre-pandemic levels.
Unemployment Rate and Labor Force Participation Rate
If the unemployment rate surpasses 4% and shows an upward trend, the economic recession debate will intensify. Simultaneously, a rise in the labor force participation rate signifies an easing of labor supply shortages, which acts as a factor in lowering wage inflation.
4️⃣ Actionable Strategies: Investment Plans
- Consider Increasing Bond Allocations: When an employment slowdown is confirmed, Treasury yields are likely to fall (bond prices rise) due to expectations of the end of hikes and potential cuts.
- Focus on Defensive Stocks: Should recession fears materialize, defensive sectors such as consumer staples and healthcare may outperform technology stocks.
- Secure Cash Liquidity: This is a period where market volatility may expand. A strategy of holding a certain percentage of cash to seize "buy the dip" opportunities remains effective.
👁️ Broadening Perspectives: Structural Changes in the Labor Market and the 'New Normal'
Rather than reacting to every month's figure, we must understand the labor market structure, which has completely changed post-pandemic. We live in a 'New Normal' era where past economic theories may no longer apply.
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Shift from 'The Big Quit' to 'The Big Stay'
Just a year or two ago, wage increases through job-hopping were the trend, but now a 'Big Stay' phenomenon—staying at current jobs due to employment insecurity—is becoming clear. This reduces labor market flexibility and can impact productivity in the long run.
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Coexistence of Tech Layoffs and Service Labor Shortages
While big tech companies are reducing headcount, face-to-face service industries still suffer from labor shortages, worsening polarization. This mismatch creates an illusion in overall unemployment indicators, making the Fed's policy judgment difficult.
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What Kind of Recession Should We Prepare For?
It may not be a recession accompanied by mass unemployment like in the past. We should consider the possibility of a 'job-full recession' or a slowdown with stagflationary characteristics, where employment is maintained but real income decreases, leading to shrunken consumption.
2️⃣ Understanding Core Insights at a Glance
We have summarized the relationship between complex employment indicators and Fed policy for intuitive understanding.
Flattening of the Phillips Curve
Traditionally, an inverse relationship (Phillips Curve) existed where low unemployment led to higher prices. Recently, this relationship has weakened. This serves as a basis for the 'soft landing' hope that the Fed can catch inflation without damaging employment.
What Investors Should Know
This suggests that just because employment is robust, it doesn't necessarily mean interest rates must be raised further. Flexibility is needed to interpret this alongside inflation indicators.
The LAG Effect (Monetary Policy Lag)
The effects of interest rate hikes implemented by the Fed usually appear in the real economy with a time lag of 12 to 18 months. The current employment slowdown may be the result of rate hikes from last year.
Why Now Matters
Because right now, in December, could be the point where the cumulative effects of tightening begin to hit the labor market in earnest.
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