Can we achieve a soft landing in the economy? Friday's jobs report shows there is a clear path to get there. Mortgage rates fell aggressively to 6.20%, which puts us more than 1% below 2022 highs.
The bond market saw wage growth cool, leaving the Federal Reserve with few reasons to continue its history of rate hikes for much longer.
We finished 2022 on a solid note, with 4.5 million jobs created last year – and we still have more than 10 million job openings and historically low unemployment claims. And now the rate of inflation growth is falling.
Bond yields fell after the report as wage inflation cools, a key to the federal reserve strategy. The Fed will not tolerate a tight labor market or Americans at the bottom of the wage pool making more money. They believe this is a bad thing and will lead to too much stalled inflation, so the fact that wage growth is cooling is a positive sign.
If the inflation growth rate and wage growth slow, the Federal Reserve won't need another rate hike. In fact, the Federal Reserve needs its own reset. This will be a big theme of mine for 2023 if this trend continues.
The bigger story here, however, is that there is a path for a soft landing for America, and the Fed should be ashamed of itself for believing that recession through job loss is the best way to kill inflation. Inflation growth rate is already falling and the labor market is still solid.
If housing inflation had a real-time tracking system, the headline inflation data would already be lower. Fortunately, the Fed created its own index to account for much of the lagged inflation in the dateline. This is a big deal because almost 43% of CPI inflation is accommodation inflation.
This is why Friday's data is so exciting to watch and the bond market sent mortgage rates to 6.20% and yes – we are back to the 5 handle mortgage rate watch. It wasn't that long ago (in October) that people were talking about mortgage rates of 8% to 10% and a major recession for the United States of America.
Jobs Report
From BLS: Total nonfarm employment rose 223 in December.000, and the unemployment rate fell slightly to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains were in leisure and hospitality, health care, construction and social assistance
This chart shows a breakdown of jobs created and lost. The two sectors of the economy that are affected are technology and housing, but this is a good report for construction. The backlog of homes that need to be built has held up construction until those homes can be completed. I can't express what a blessing that is, because the best way to fight inflation is always to add more supply.
Here's a breakdown of the unemployment rate tied to educational attainment for people 25 and older.
- Less than A-level: 5.0% (previously 4.4%)
- High school graduation and no college: 3.6%
- Some college or associate's degrees: 2.9%
- Bachelor's degree or higher: 1.9
As we can see above, there is a shortage of labor for college graduates; this is an important reason why the unemployment rate is below 2%. Work visa supply of labor is simply not enough to supply this pool.
The unemployment rate has found a low of about 3.5%, and I would remind people that even if the unemployment rate is still at 3.5%, the rate of inflation growth is falling.
You don't have to create a recession with job cuts to lower inflation. I understand why some people believe this. However, before COVID-19 happened, we had a very strong job creation rate in 21. There is no runaway inflation in the twenty-first century, neither here nor in other mature economies, where population growth is slowing down.
Inflation and bond yields
The real story today is that bond yields are ahead of the Federal Reserve again. No matter how many Fed people have been talking for months about needing tighter financial conditions, the bond market is saying otherwise.
The Fed's premise that a recession caused by job losses is necessary to bring inflation down should be rejected by all. If the rate of inflation growth was still out of control and wage growth was exploding higher, then we would be having a different conversation. However, I firmly believe that the bond market has always told us that this was not the 1970s.
The 1970s saw higher inflation and higher bond yields, and inflation was more entrenched then. The 10-year yield, as I speak, is at 3.58% on Friday, even after all we've been through. The rate of growth in core PCE inflation, which the Fed wants to bring back down to 2%, should have a three-point this year.
I have seen on the 27th. October 2022 made the case for lower mortgage rates and then wrote about how we could still avoid a recession by losing jobs in November. In both articles, one factor was decisive: the growth rate of inflation is falling. This is happening now, even with a labor market that still has over 10 million job openings.
The second key is falling bond yields; I'm not even talking about rate cuts yet. First things first: inflation growth rate is falling and bond market yields are falling with it.
Right now, both of those things are falling from their recent highs. The Fed can't control Russia, OPEC or bird flu, and the US dollar won't collapse. However, any increase in interest rates at this time will be to their detriment. They have expressed their belief that they would raise the Fed Funds rate to the core PCE level, and if the inflation trend continues like this, the 10-year yield is more correct than the Fed's today.
To recap, we had another solid jobs report on Friday: the unemployment rate is low, job openings are high, and jobless claims are historically low. I firmly believe that the Fed does not need to continue its path of sounding like a hawk at this stage of the economic expansion, as we are already seeing signs of a decline in inflation.
Let's not forget that the biggest inflation driver for the CPI report is housing inflation, and that is already cooling dramatically.
The Fed should at some point think about going back to being a dual mandate organization since they brought forward so many rate hikes so early on. They should keep that up and watch the data get better. I don't know if they are that smart or know that they can do the victory lap. However, what we have seen in recent months has been very encouraging for those who do not want to see recession through job losses.