The Fed employs its policy tools to regulate the availability and cost of credit in the economy, which is primarily aimed at affecting employment and inflation. As we near the conclusion of 2023, investors are paying close attention to indicators that may impact the Fed's interest rate determinations.  

Several employment indicators were released in early December, including the Job Openings and Labor Turnover Survey (JOLTS) report for October, the ADP private employment report for November, and the BLS employment report for November. The market had anticipated a slowdown in employment and inflation indicators. While the first two did slow down as expected, the JOLTS job vacancy rate dropped to its lowest level in two and a half years. However, the non-farm payroll report for December 8th exceeded market expectations.

The non-farm payroll report had different effects on different markets: the stock market rose while gold and Treasury futures fell.

Why is there such a disparity in the employment data? What are the trends in the job market for 2024? How do these employment indicators affect the stock market? We'll answer these questions one by one.

Let's review the three key employment reports released recently

1. JOLTS Job Openings

The latest report from the US Bureau of Labor Statistics shows that job vacancies decreased to 8.733 million in October, lower than expected and the lowest level in 2.5 years. In October, there were 6.506 million unemployed people and 8.733 million job openings. This means that there were 1.34 job openings available for every unemployed worker in October.

1. ADP Non-Farm Employment

In November, ADP reported an increase of 103,000 jobs in private non-farm employment, slightly slower than the 106,000 jobs added in October. The data was also lower than the expected 130,000, making it the second-smallest monthly increase since January 2021.

ADP divides non-farm private employment into two categories: goods-producing and service-providing. As the US is mainly a service-based economy, in November, goods-producing jobs decreased by 14,000, while service-providing jobs increased by 117,000, showing the resilience of the service sector.

1. Non-Farm Employment

The recent driving force and uncertainty in the economy can be attributed to the non-farm payroll report released by the Bureau of Labor Statistics on December 8th.

The data showed that seasonally adjusted non-farm employment increased by 199,000 in November, slightly better than the expected 190,000 by Dow Jones, and higher than the 150,000 in October. CNBC reported that this figure was due to the significant increase in government recruitment and the return of workers following strikes in the automobile and entertainment industries. With a slight increase in labor force participation, the unemployment rate fell to 3.7%, lower than the expected 3.9%.

Why is there such a large discrepancy in employment data?

In our macro course "Investing and Labor Market Indicators", we learned about several key employment market indicators closely watched by the Federal Reserve. However, due to differences in calculation methods and statistical criteria, different institutions' employment indicators may differ in short-term trends.

The most well-known employment indicator is non-farm payrolls published by the Bureau of Labor Statistics. However, ADP also releases private non-farm employment data a few days before non-farm payrolls, which is why many investors pay close attention to ADP employment.

Differences between Non-Farm Payrolls and ADP Employment:

• Coverage difference: Nonfarm payrolls (NFP) is a survey conducted by the Bureau of Labor Statistics for US businesses and government agencies, while government employees are excluded from the ADP report.

• Release time difference: The NFP report typically arrives on the first Friday of each month, while the ADP report typically arrives on the Wednesday prior. ADP payrolls can offer an excellent guide to the NFP numbers that follow.

• Trend difference: NFP and ADP payrolls share roughly the same trend in the long term, but in the short run, they often deviate. The greater the turbulence in the labor market, the easier it is for the two survey results to diverge.

• As the NFP report is official, market participants and federal officials tend to pay more attention to the NFP figures.

JOLTS reports are also a critical indicator of employment.

The labor market can be divided into the labor supply side, represented by employed and unemployed individuals, and the demand side, represented by employed individuals and job vacancies.

On the supply side, employed individuals represent current supply that has been met, while unemployed individuals represent potential supply that has not yet been met.

On the demand side, employed individuals represent current demand that has been met by employers, while job vacancies represent potential demand that has not yet been met.

While JOLTS reports are also published by the Bureau of Labor Statistics, they differ from non-farm payroll reports. JOLTS reports survey job vacancies, recruitment, and separations to provide data on measuring labor demand. In contrast, non-farm payroll reports measure the labor supply side through new non-farm employment and unemployment rate.

What are the employment market trends for 2024?

US Bank's analysis shows that rapid job growth has been a trend in the economy for 2021 and 2022. While job growth remained stable in 2023, it slowed down significantly.

Morningstar analysts predict that the labor market is steadily recovering to pre-pandemic levels. Employment will likely slow down in the first half of 2024 as the economy continues to decelerate, but will recover when economic growth accelerates again in 2025-26.

Morningstar forecasts the main trends for next year include:

• A downward trend in employment recovery: Recent strong GDP growth led to a hot job market, but the economy is expected to slow down soon and be close to or slightly less than zero in the first half of 2024.

• Layoffs or more efficient work by companies: Companies have been reducing working hours, and temporary employment has been declining over the past year, which often precedes broader layoffs. This reduction in working hours will likely lead to a slowdown in employment.

• Wage growth will continue to slow down: The private hourly wage growth rate has dropped significantly from 4.5% at the beginning of 2023 to an average of only 3.4% in the past three months. Currently, the private hourly wage growth rate has been declining, compensating for the impact of high inflation in 2022. This effect should normalize in 2024.

• Significant decrease in job vacancy rates: The job vacancy rate dropped from a record high of 7.3% in March 2022 to an average of 5.5% in the past three months. The decline in employer demand may not be due to excessive wage growth, but this indicator is normalizing.

How will the employment market affect the stock market?

Investors may view a slowdown in employment as good news because it means the Fed will not raise interest rates, and lowering interest rates is likely to accelerate next year.

The normalization of inflation and slowly slowing employment markets are also good news for the stock market. On one hand, long-term bond yields will continue to decline, which benefits corporate and personal borrowing. On the other hand, investor confidence may support stock market gains under the expectation of lower interest rates.

However, a slowdown in employment also means a slowdown in the economy. In 2024, the US economy may face many obstacles, including the risk of government closure if legislators do not take action. Additionally, the 2024 presidential election in the US may have a huge impact on the stock market and the global economy.

As the core of a country's economy, many analysts warn of the potential risks that the US stock market may face in the event of an economic slowdown next year. The economy may contract at some point in the first quarter of next year, causing the S&P 500 index to fall from its current level, according to Evercore's equity division.

Therefore, investors still need to be vigilant about potential fluctuations and risks.

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