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Key Points for the Week

  • The two major employment surveys continue to produce different results. The establishment survey reported businesses and other establishments created only 199,000 jobs and missed expectations of 400,000.
  • Meanwhile, a survey of households estimated employment grew by 650,000 jobs and the unemployment rate fell to 3.9%.
  • Federal Reserve minutes indicated support for shrinking the balance sheet quicker than expected, and growth stocks lagged value stocks to begin the year.
  • Our next Town Hall is scheduled for Wednesday, January 19th at 6:30 p.m. To register, please use the link here.

In the 1950’s, then Fed Chair William McChesney Martin described the Federal Reserve as “the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

In 2020, the opposite was true. The Fed, along with fiscal policymakers, filled the stimulus punch bowl to the brim to keep the country from falling into a recession or depression. In November 2021, Fed Vice Chair Richard Clarida explained:

The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. and global economies since the Great Depression. Gross domestic product (GDP) collapsed at a nearly 33 percent annual rate in the second quarter of 2020. More than 22 million jobs were lost in just the first two months of the crisis, and the unemployment rate rose from a 50-year low of 3.5 percent in February to a postwar peak of almost 15 percent in April 2020…The fiscal and monetary policy response in the United States to the COVID crisis was unprecedented in its scale, scope, and speed.

Richard Clarida, Fed Vice Chair

That stimulus helped the economy recover quickly. As a result, demand for goods rose and exceeded supply, pushing prices higher. The Fed did not act immediately to tame inflation because its members believed price increases would subside as supply chain issues eased. Then, in November, inflation was 6.8 percent year-over-year, as measured by the Consumer Price Index. The cost of housing, which typically is not a transitory indicator, was up more than 3 percent year-over-year.

In December, the Fed adjusted its outlook on inflation, removing the word “transitory,” and accelerated the pace at which it would reduce monetary stimulus. Fed Chair Jerome Powell explained:

…in light of the strengthening labor market and elevated inflation pressures, we decided to speed up the reductions in our asset purchases. As I will explain, economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy.

Jerome Powell, Fed Chair

Major United States stock indices dropped after Powell’s remarks before climbing to new highs in December.

Last Wednesday, the minutes of the Fed’s December meeting were released. Investors appeared to be surprised by the changes in the Fed’s change in tone, reported Ben Levisohn of Barron’s. Share prices tumbled again and the yield on 10-year Treasury notes moved higher.

This Week in the Markets

The employment report released last week may have raised more questions than it answered. The establishment survey, which surveys businesses, showed only 199,000 jobs were created, missing expectations of 400,000. The household survey gave a very different picture. Unemployment fell to 3.9%, employment rose by 650,000, and 170,000 people joined the labor force. The gap is partly reconciled by reports new businesses are being formed at a rapid pace and the usually more accurate establishment survey isn’t keeping up with the underlying changes.

CTN 01-10-22 Image 1

The report of the Federal Reserve’s minutes last week provided some answers, and investors didn’t like them. The Fed communicated it would likely allow its balance sheet to shrink shortly after the first interest rate increase. After the global financial crisis of 2008-2009, the Fed didn’t reduce its balance sheet until two years after first raising rates.

Stocks reacted negatively to the news. The S&P 500 index shrank last week, with most of the losses occurring the day the Fed released its minutes. The MSCI ACWI was down as well. The Bloomberg U.S. Aggregate Bond Index declined as a quicker balance sheet reduction means the market will have to absorb more debt and rates may rise. Inflation data and retail sales headline this week’s key data releases.

Confusing Reports and Some Fed Clarity

2022 looks like it might be a more volatile year. Stocks were down for the first week of January. The decline was caused primarily by adjustments to Fed policy, although investors with gains waiting to sell in a new tax year may have contributed to the selling. Stocks performed quite differently based on style and sector. The Russell 1000 Value Index climbed 0.8% last week. The Russell 1000 Growth, which emphasizes faster growing stocks, fell 4.8% as key sectors such as technology and health care both declined sharply.

The U.S. employment report, released later in the week, provides insight into the economy the Fed is trying to tame. The December report was released Friday and, while the headline number of new jobs was below expectations, the report included good news for the job market. According to the establishment survey, December nonfarm payrolls increased by 199,000, which was below expectations of 400,000. This miss can be attributed to a lag in hiring in leisure and hospitality, likely caused by the powerful Delta and emerging Omicron variants. However, payrolls from the previous two months were revised upward and capped off a year where 6.4 million jobs were created, a record for the U.S. economy.

The household survey told a better story as the unemployment rate fell to 3.9% versus expectations of 4.1%. Even better news is the unemployment rate fell because more people were hired, not because people dropped out of the labor force. Employment rose by 650,000 and the labor force grew by 170,000. The differences between the two surveys can partly be attributed to increased self-employment. New business applications are 55% higher than two years ago, and the usually more accurate establishment survey misses that growth. Last month’s report showed a similar gap and serves to remind us that surveys are approximations of a vast and complex economic system.

The Fed is responsible for trying to manage all this complexity. The minutes from its last meeting included some new information that pressured growth stocks in particular. In its latest meeting, Fed officials indicated they would likely reduce the balance sheet more aggressively than the past economic cycle. The Fed didn’t start decreasing its balance sheet in a meaningful way until 2018. The decision to wait years after the first interest rate hike to start adjusting the balance sheet meant it was elevated when the pandemic hit. Since then, it has continued to climb.

Rather than wait after raising rates, the Fed seems more likely to start reducing its balance sheet soon after the first hike. That way, the Fed can avoid having short-term rates increase because of rate hikes while long-term rates stay low because the Fed owns so much of the supply. Higher long-term rates affect growth stocks more because more of their earnings are generated farther into the future and interest rates affect how much those earnings are worth today.

All of this points to the Fed raising rates at its March meeting, which would align with the end of the newly accelerated tapering program. Then the Fed will start the slow reduction of its balance sheet and raise rates two or three more times this year. Chair Jerome Powell has said the aim is to get to full employment. At 3.9% unemployment, it’s likely the economy is close.


Last week’s unemployment report illustrated, once again, a remarkable divergence in the messages delivered by the data. Here is what we learned:

  • The U.S. added 199,000 jobs. When the Bureau of Labor Statistics (BLS) calculates the number of jobs added to the U.S. economy each month, its data come from an employer survey.

    Last week’s report showed that 199,000 jobs were created in December. That was a lot lower than expected. Dow Jones estimated 422,000 new jobs would be created, according to Jeff Cox of CNBC. The low employment number suggests U.S. economic growth may be slowing, reported Colby Smith, Andrew Edgecliffe-Johnson and Christine Zhang of Financial Times.

    Of course, the number of jobs created in December may be revised higher over the next two months. Last year, “…revisions from the first estimate to the third and final release…added nearly 1 million jobs to the initial releases – 976,000 to be exact, through October,” reported CNBC. That was the highest upward adjustment ever in a single year, according to Financial Times.

  • The unemployment rate fell to 3.9 percent. When the BLS calculates the unemployment rate, its data come from a household survey.

    In December, that survey showed the unemployment rate fell to 3.9 percent overall. Unemployment rates varied by race: 3.2 percent for white people, 7.1 percent for Black people, 3.8 percent for Asian people, and 4.9 percent for Hispanic people. The low overall unemployment rate suggests the economy is experiencing strong growth.

    Rising wages and record numbers of job openings also indicate economic strength. Average hourly earnings for U.S. workers rose 4.7 percent in 2021, and there were 10.6 million job openings in November, according to last week’s BLS Job Openings and Labor Turnover report. The report indicated that 6.7 million people were hired and 6.3 million left their employers.

Why is the unemployment data wonky? An expert cited by Financial Times reported:

The economic fundamentals have been shifting at unprecedented speed. Not in my lifetime and not in the lifetime of most people alive today have we seen…an economic recovery that has been as rapid as it has been since the spring of 2020...The challenges of economic measurement in a pandemic environment are enormous.

An expert cited by Financial Times

Did you Know? This Week in History

January 10, 1901: Gusher Signals Start of U.S. Oil Industry

On January 10, 1901, a drilling derrick at Spindletop Hill near Beaumont, Texas, produced an enormous gusher of crude oil, coating the landscape for hundreds of feet and signaling the arrival of the American oil industry. The geyser was discovered at a depth of over 1,000 feet, flowed at an initial rate of approximately 100,000 barrels a day and took nine days to cap. Following the discovery, petroleum, which until that time had been used in the U.S. primarily as a lubricant and refined into kerosene for lamps, would become the main fuel source for new inventions such as cars and airplanes; coal-powered forms of transportation including ships and trains would also convert to the liquid fuel.

Beaumont became a “black gold” boomtown, its population tripling in three months. The town filled up with oil workers, investors, merchants and con men (leading some people to dub it “Swindletop”). Within a year, there were more than 285 actives wells at Spindletop and an estimated 500 oil and land companies operating in the area, including some that are major players today: Humble (now Exxon), the Texas Company (Texaco) and Magnolia Petroleum Company (Mobil). Exxon and Mobil have also merged to become ExxonMobil.

Spindletop experienced a second boom starting in the mid-1920s when more oil was discovered at deeper depths. In the 1950s, Spindletop was mined for sulphur. Today, only a few oil wells still operate in the area.

Weekly Focus

It seems to me that I will always be happy in the place where I am not.

Charles Baudelaire, French Poet

The supreme accomplishment is to blur the line between work and play.

Arnold Toynbee, English Historian