Job creation topped expectations in December, adding 223,000 jobs

There’ve been plenty of signs that the economy is poised to lose momentum this year, borne out by an inverted yield curve and leading indicators that point to significant near-term recession risk. The once red-hot jobs market has cooled considerably but is still far from recession territory, with unemployment receding to a half-century low, exceptionally high job openings, and respectable job creation. That’s good news for American workers but a challenge for a Fed that’s looking for more tangible evidence of loosening in labor market conditions.

The economy created 223,000 net new jobs in December, despite a growing list of companies that have announced layoffs in response to cooling demand. Gains were relatively widespread across the goods-producing and service sectors. Gains even extended to the manufacturing sector, despite a contraction in new orders and production late last year.

Moderate revisions to the preceding two months shaved a bit off that gain, but the three-month average of 247,000 remains solid. Compared to one year ago, the pace of job creation has slowed considerably, but monthly gains still exceed the average monthly pace of job creation in the latter half of the last expansion. By virtually any measure, the economy is still creating jobs at a hearty pace. That creates a “good news is bad news” for policymakers that view the lack of slack in labor markets as another factor that skews inflation risk to the upside.

The Fed’s aggressive tightening last year has started to have an effect but hasn’t yet been fully absorbed into the economy. The key question that remains unanswered is how much more will policymakers feel compelled to do to create some breathing room in the jobs market and bring inflation back down to the Fed’s 2% target. What’s clear is that they aren’t done yet, and the December jobs report should stiffen their resolve.

The struggle to find workers as the economy boomed is almost certainly weighing on the minds of employers that may be seeing slowing demand but are hesitant to cut payrolls. There’s a slow erosion in average weekly hours, which have declined by a half hour over the past year. That may seem like a small difference in the context of an individual worker, but it represents a sizable decline within the context of the labor force.

For now, it appears that employers are more focused on trimming hours than cutting workers. At some point, that will change.

Measures of consumer inflation are receding; some are even suggesting that price pressures could ease relatively rapidly in the coming months as global demand wanes and inventory and supply chain imbalances dissipate. Progress toward the Fed’s objective of cooling labor conditions has been slower.

If there’s a bright spot for employers and policymakers, it’s in wage data. Average hourly earnings increased by 0.3% for the month, but the year-on-year increase slipped to 4.6%. That’s still high compared to the past two decades and has been a source of some relief for American workers that have faced stiff inflation for almost everything they’ve been spending on in the past year. For policymakers, it’s been a source of frustration as those wages feed through into higher prices, particularly in the service sector.

Fed Chair Jerome Powell has repeatedly indicated that there will need to be “pain” to restore balance to labor markets and bring inflation down. It seems clear that progress has been made, but has that pain been felt? Certainly that’s already been the case for some workers, but it’s hard to make that case on a broad scale. That’s still to come.

The bottom line? Labor conditions are easing but not nearly quickly enough to satisfy Fed policymakers looking for reassurance that they’ve done enough to achieve their policy goals. That means more interest rate hikes until job creation becomes job losses and the unemployment rate moves meaningfully higher.