Unemployment falls to 3.9% despite weaker-than-expected job creation in December
Nonfarm payrolls rose by just 199,000 in December, falling well short of expectations for a gain of 424,000. Revisions to the preceding two months tacked another 141,000 onto prior gains though, mitigating the degree of disappointment.
The report stood in sharp contrast to the December ADP report released earlier this week. That report had shown a surprisingly strong increase of 807,000 in private sector payrolls for the month. The outsized gain had lifted expectations for today’s release, although the relationship between monthly job gains between the two have often been tenuous at best.
Looking beyond nonfarm payrolls specifically, other key components of the report point to labor market conditions that were already tight and became even tighter to close out the year.
The unemployment rate dipped to 3.9%, down from 4.2% in November, but the rate alone doesn’t tell the full story. Strong job creation over the course of 2021 was clearly the greatest driver behind the decline, as the economy added over 6.4 million jobs for the year. Even so, the labor force itself hasn’t recovered and remains about 2.3 million lower than its February 2020 peak. Labor force participation at 61.9% remains 1.5% below its 63.4% level in early 2020. This helps to explain why employers are struggling to fill openings despite a shortfall in nonfarm payrolls of about 3.6 million workers compared to the pre-pandemic peak. Workers left the workforce during the heart of the pandemic, and many still haven’t returned, shrinking the pool of available talent.
Tight labor market conditions are readily apparent in the surge in wages over the past year. Average hourly earnings increased by 4.7% in 2021, up 0.6% in December alone. As the competition for workers intensifies, employers are sweetening the pot to attract and retain people, which comes as welcome news for workers, but a reality that’s contributing to rising prices for many goods and services.
A moderate slowdown in job creation is unlikely to meaningfully nudge a Fed that appears to be moving more rapidly toward rate hikes to cool inflation. Inflation continues to run well above the central bank’s 2% target, and upward pressure on prices are showing signs of being a bit stickier than the Fed had previously forecast. With the economy now closing the year out closer to full employment that most would’ve expected at the outset of 2021, the table appears to be set for the Fed to move much more aggressively than either their forecasts or markets would have anticipated earlier last year.
The bottom line? By virtually any measure, this is a job market that favors workers and is thus challenging employers. The slowdown in job creation doesn’t reflect soft demand but the growing difficulty in filling those openings. Tight labor market conditions are likely to persist well into 2022.
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