Jobs Report: Cooler Wage Growth, Weak ISM Are Good News For Fed; Dow Jones Rises

The jobs report for Friday showed good hiring numbers, but wage growth was not as high as predicted, which may mean that the Fed won't have to raise interest rates as much as previously thought.

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May 14, 2023 • 4 min read

In December, employers added 223,000 new payroll positions while the unemployment rate dropped to a level not seen in 50 years. The wage growth was much slower than expected, and the number of hours worked by workers fell for a second consecutive month. The Fed should be able to slow down its rate of interest rate increases based on the data. Dow Jones Industrial Average rose after the jobs report.

The Institute of Supply Management’s Services Index, which has fallen to a contractionary level below 50 for the very first time since May 2020, echoes the softer components of this report.

The ISM reading was released at 10 am. The odds of the Fed reducing its rate hike to 25 basis points by February 1 have risen to 76%.

The private sector added 220,000 positions, while the government added 3,000.

While October and November were revised downwards, the average hourly wage increased by 0.3% in December. The 4.6% annual wage growth missed expectations of 5%.

The combined job gains for November and October were revised downward by 28,000.

The unemployment rate fell from 3.7% to 3.5%, which was expected.

The Labor Department's monthly employer survey provides the headline figures for employment and wages. Separate household surveys provide information on labor force participation, employment status and unemployment rates.

The survey of households showed that the number of employed people increased by 717,000. The number of unemployed workers decreased by 278,000 as 439,000 new people entered the workforce, which means they are either working or searching for work.

The rate of labor force participation among those aged 16 and older increased to 62.3%, up from 62.2%.

In Friday's morning trading, the Dow Jones rose 1.5%. The S&P 500 rose by 1.4% while the Nasdaq composite jumped 1.2%.

The yield on the 10-year Treasury fell by 12 basis points, to 3.6%.

The Dow, S&P 500, and Nasdaq Composite all fell by more than 1% on Thursday and closed at the bottom of the trading ranges they had been in for the past two month.

The Dow is up 14.6% since its closing low on Sept. 30, but it remains 10.5% under its closing record. The S&P 500 is 20.6% lower than its record-breaking closing high, and 6.5% higher than its 52-week low of Oct. 12, which was set on October 12. The Nasdaq has only risen 0.9% since its 52-week bottom on December 28, after falling 35.8% off its record high.

The Dow Jones and the broader market may have some room for a rally after the recent selling pressure. The latest Fed minutes include an implicit warning for investors to not get carried away. The minutes stated that "an unwarranted ease in financial conditions" would work against Fed policies and "complicate" efforts to restore prices stability.

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The aggregate number of working hours in the economy fell 0.1%, after falling 0.2% in November. This is due to a shorter workweek. It was 34.3 hours in December, down from 34.4 in November and 34.5 hours in October.

The number of temporary jobs dropped by 35,000 in the third consecutive month, which economists believe is a leading indicator for broader labor market weaknesses.

Manufacturing jobs increased by 8,000. Construction jobs rose by 28,000. Retailers added 9000 jobs. The leisure and hospitality sector added 67,000 jobs. Jobs in the health care and social assistance sector grew by 74,000.

The ISM Services Index dropped to 49.6 in the last month from 56.5, well below expectations of 55. Readings below fifty indicate contraction.

The ISM subindex for new orders dropped 10.8 points, to 45.2. The employment index fell 1.7 points, to 49.8, as a result of a combination economic uncertainty and the inability to fill vacant positions. The ISM's overall reading was also affected by the supplier delivery index, which reflected improved logistics and increased capacity after a period when supply chains were struggling.

The ISM’s current services business activities index remains positive but has dropped 10 points to 54.7.

The unexpectedly weak wage data influenced the financial markets. The 0.6% increase in average hourly wages reported for November was revised down to 0.4%. Labor Department data shows wage growth below 5% over the last three months. The reading of 4,6% is the lowest since August 20,21. Jonathan Pingle, UBS economist, said that wage growth over the past three-month period has been 4.1% on an annualized basis.

The Fed's outlook is largely based on wage growth. Jerome Powell, Federal Reserve chair, has stated that wage growth of 3% would be in line with the Fed's inflation target of 2%.

The latest news about wages has been met with relief, even though there are likely to be more surprises ahead. The Fed may tighten its monetary policy into spring, despite the fact that the unemployment rate has dropped and jobs are growing despite fewer hours. It may be premature for wage growth to slow down, as many employers award wage increases at the beginning of the year.

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