The U.S. labor market ended 2023 with another month of higher-than-expected hiring, low unemployment, and steady wage gains. Despite some signs of cooling, the December jobs report gives the Federal Reserve room to keep fighting inflation by holding interest rates steady, rather than contemplating near-term cuts to spur economic growth.
The U.S. added 216,000 jobs in December, according to data released Friday by the Bureau of Labor Statistics. The growth surpassed the forecasts of many economists and exceeded November’s revised gain of 173,000.
Nonfarm payrolls rose by 2.7 million for all of 2023, with an average monthly gain of 225,000 jobs.
“The economy closed out the year on a high note, with stronger-than-expected labor-market trends,” wrote George Mateyo, Key Private Bank’s chief investment officer. “As a result, the Fed will be encouraged to maintain a ‘higher for longer’ stance with regard to interest rate policy. Market participants who thought the Fed will be aggressively cutting rates in 2024 will need to walk back their forecasts.”
Stocks initially fell on the news, although shares later rebounded as investors weighed elements of weakness in the report.
Specifically, the BLS revised lower by about 71,000 the employment gains reported for October and November. October’s initially reported payroll gain was revised down by 45,000 to 105,000, while November’s reported job growth was reduced by 26,000 to 173,000.
The response rate to December’s payroll survey was low, which suggests coming revisions to the December data, as well.
Employment gains also are growing more concentrated, with significant growth now coming from the public sector. Local and federal government reported 52,000 job gains in December, while private-sector job growth slowed more than overall job growth. By the end of last year, three sectors—healthcare, government, and leisure and hospitality—were driving 92% of all job growth, according to ZipRecruiter’s Julia Pollak. “Outside of those sectors, labor markets were starting to look anemic,” she said.
Last year’s net job gains represented a more “middle-of-the-road” performance, Pollak wrote. She noted that employment grew only 1.7% over the year, putting 2023 in the bottom half of all years since 1948.
The labor-force participation rate also slid in December, to 62.52% from 62.78% in November. December’s rate is the lowest recorded since February 2023. Labor-force participation was relatively unchanged over the course of the year, but a continued decline would be cause for concern.
Additionally, both the prime-age labor participation rate and the employment-to-population ratio for workers ages 25-54 also dropped in December.
Unemployment remained steady at a near-historic low of 3.7% in the month. It would have been higher if not for a 676,000 decline in the number of people counted as part of the civilian labor force—that is, people working or looking for work, as measured by the BLS’ household survey.
The number of workers employed part-time for economic reasons—4.2 million in December—didn’t change much from November’s tally. But part-time payrolls grew by 333,000 over the past year, reflecting an increase in individuals who want full-time employment but were unable to find it, or who worked part time because their hours were cut.
These weak spots likely aren’t enough to rewrite the Fed’s script for 2024, at least not yet. That is especially true given wage growth reaccelerated slightly in December. Average hourly earnings rose 4.1% year over year, compared with the 4% rate recorded in November. That was also higher than the consensus call for 3.9% growth from economists surveyed by FactSet.
On a monthly basis, wages grew by 0.4%, consistent with November’s pace and ahead of economists’ forecasts. Rising wages will likely catch the attention of Fed officials, given the impact pay has on so-far-sticky services inflation.
“The hourly earnings increase, at 0.4%, is notable and while also just one data point, it bears watching,” wrote Matt Peron, director of research and global head of solutions at Janus Henderson Investors. “While in the short term this could be a boost to the consumer, if wages don’t continue to soften, that could present a more challenging backdrop for the Fed, and eventually the market.”
Friday’s report reinforced that the U.S. labor remains strong, and further highlighted the challenge the Fed will face in bringing inflation down to its 2% annual target from more than 3% currently.
“Today’s report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation,” wrote Andrew Patterson, Vanguard’s senior international economist. “Strong headline job growth and wage growth above 4% combined with Fed communications—including the minutes [of the December Federal Open Market Committee meeting] emphasizing the need to remain higher for longer—decrease the likelihood of preemptive rate cuts.”
Patterson believes these factors likely will delay policymakers’ discussions of rate cuts, and push the first reduction into the second half of 2024.
Write to Megan Leonhardt at [email protected]
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