The Federal Reserve Pivot Is Coming In December; Here's Proof

The Federal Reserve is going to make a change in December because the next jobs report is expected to be bad.

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May 14, 2023 • 4 min read

The Federal Reserve will not pivot until there are signs that the labor market is cracking. Once the job market seems to be in a slump, however, everything will start to change. As incomes decline, inflation is less likely to fuel a spiral of wage-price increases and more likely will cause consumers to cut back.

As long as the monthly job reports show steady gains, the Federal Reserve can continue its 75-basis point rate increases. The Fed can cool a hot job market politically, but rate hikes of 75 basis points won't work if the market is already losing steam.

It looks like a fourth consecutive 75-basis point rate hike on Nov. 2 is almost certain, as there are no major economic reports in the interim. The odds of a fifth consecutive supersize rate hike on December 14 are now around 65% according to CME Group’s FedWatch page.

It's almost certain that we will get a poor October jobs report by November 4.

The reason is revealed when you look at the data. In the first nine month of this year, seasonal adjustments have boosted private payrolls 851 000. This is a half million extra jobs in comparison to the average seasonal adjustment impact from September 2013 to 2021.

This year's seasonal adjustments has provided an average increase of 539,000 jobs compared to the average seasonal adjustments from March through September in the previous nine years.

Two things are evident. This shows two things. This means that hiring and income increases are likely to be revised downward, showing consumers have less savings to weather an economic downturn.

The most important thing for the outlook of the financial markets is that the stubbornly high gains in employment are about to reverse as seasonal adjustments reverse.

Economic data are adjusted to reflect seasonality so that the true trends can be seen, and not obscured by fluctuations. In this year's employment report, the private sector employment dropped by 2.4 million jobs from the previous month. The Labor Department, however, reported that private sector employment increased by 492,000 jobs after season adjustment.

Seasonal adjustment is supposed to balance over the course the year. It usually does. Since 2013, the net cumulative seasonal adjustment has only exceeded zero once (+83,000 in 2016.

This means that we are about to see a major payback on the 851,000 seasonal boost to private sector payrolls from September. The October employment report is expected to show the most dramatic reversal.

The closest comparison is 2021's season adjustment. The seasonal adjustment for October last year reduced private payrolls to 709,000, compared with a -533k adjustment in 2019 or -465k in 2018.

We should expect a negative payroll adjustment even more significant in October, since the net seasonal adjustment for this year through September was +265,000 as compared to 2021.

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The big seasonal adjustment last year coincided with a hiring spree during the holiday season. This year, holiday hiring doesn't look as good. This could mean that actual hiring is weaker than expected after large negative seasonal adjustments made in October and to a lesser degree, November.

Challenger, Gray & Christmas, an outplacement firm, reported on October 6 that in September, companies had announced plans to hire 380,000 employees. This was down from almost 940,000 workers a year earlier and the lowest total for September in 2011.

At least in part, the big gap can be attributed to companies like Amazon.com. (AMZN), who announced plans to hire 150,000 seasonal employees only in October. Despite this, hiring plans for the year have been muted.

Walmart (WMT), a retail giant, announced that it would hire 40,000 people. This is down from the 150,000 employees they had a year earlier. Macy's cut its hiring plans to 41,000, down from 76,000 a year ago. UPS (UPS), Target (TGT), and other companies have announced the same plans as last year to hire 100,000 people. FedEx (FDX), who announced a major cost-cutting program in September that included closing certain sorting facilities because of lower volumes, has not made any announcements about hiring intentions. The company will hire 100,000 seasonal workers in 2021.

To give a sense of context, the private sector payrolls in October and in November 2018 and 2019 rose by around 1 million without adjusting for seasonal effects. After seasonal adjustment, a similar total could result in a flat or even negative payroll reading this year.

The tight labor market makes it difficult for employers to hire on time. This year will be more difficult, as payroll employment has increased by 5.26 million since last year.

A weak October payrolls report will probably prevent a fifth consecutive 75-basis point rate hike. A weak report for October and November could rule out a rate hike of half a point.

The outlook is also dependent on the financial markets' actions between now and then. If the stock market continues to rise and the global bond and currency markets pull back from the edge, the Federal Reserve will have more room to continue raising rates. A combination of market distress with a shrinking labor market may force the Fed to hike by a quarter point in December. This could be the final one.

To stay informed about the market's underlying trend and how it affects your trading decisions, read IBD’s The Big Picture daily column in the afternoon.