The December jobs report showed solid job creation, adding 216,000 jobs for the month
Along with inflation, the labor economy has been front and center for those attempting to determine how soon the Fed could reverse course on interest rates and whether a pre-emptive easing could come soon enough for the economy to avoid a hard landing. Whether or not the December employment report provides reassurance or raises further doubts is in the eye of the beholder.
Momentum in the labor economy remained positive and exceeded expectations, closing out 2023 on a solid note. The economy created 216,000 jobs for the month, cutting across both the public and private sectors and crossing most industries. That easily topped forecasts for a gain of 170,000, but downward revisions to the preceding two months sliced 71,000 out of the cumulative job gains for the fourth quarter, reducing the net gain for the month to 145,000.
Those downward revisions weren’t enough to cast doubt over the underlying stability of job market conditions; an average of 165,000 jobs per month created in the fourth quarter was still a solid print. At the same time, there’s ample evidence that the demand for labor continued to slow as the year progressed, illustrated clearly by the slower pace of job creation in the second half of the year.
The unemployment rate remained unchanged at 3.7% in December, closing out the year 0.2% higher than where it ended 2022. That uptick is directly attributable to a corresponding increase in labor force participation, which increased 0.2% in 2023. The return of more sidelined Americans to the labor force provided a valuable pool of additional workers to an economy that was recovering from a severe shortage in recent years, with demand outstripping the supply of available workers. While fractionally higher than a year ago, the unemployment rate still reflects tight labor conditions.
The report wasn’t all good news, as average hourly earnings rose at a higher-than-expected 0.4% clip in December, lifting the 12-month gain fractionally to 4.1%. Strong wage gains may provide additional fuel for consumer spending but does nothing to alleviate inflation concerns, particularly in the service sector. Continued upward pressure on wages may make it more difficult for the Fed to start down the path of trimming short-term rates in the near term.
There are also cracks in the payroll data that could be an early sign of additional weakness in the pace of job creation in the months ahead. Employers shed 33,000 temporary workers last month, extending the trend of cuts throughout the past year. That’s frequently a precursor to wider layoffs, although the most recent episode has been unusually long, which could speak to more employers transitioning some of those temporary workers to full-time positions rather than cutting their overall headcount. The number of employed temporary workers peaked in March 2022 – nearly two years ago – and has now slipped to a level below its peak near the end of the last expansion. This trend will be worth watching, particularly as the number of job openings reverts toward its pre-pandemic range.
The report will intensify the debate surrounding the near-term outlook for Fed policy. Investors had initially embraced forecasts for Fed rate cuts in 2024, emboldening risk-taking as long-term interest rates receded in anticipation of Fed easing. More recently, policymakers have seemingly been focused on reining in expectations a bit, pushing back against the idea that cuts are imminent. Fed policymakers don’t seek to tighten the economy into a recession but are equally conscious of the risk of loosening too quickly, providing the spark for a second flareup in inflation. That outcome could be even more problematic for a Fed that doesn’t want its legacy to be a failure to address the greatest inflation challenge for the U.S. in decades.
The bottom line? Job creation remains solid, but persistently strong wage growth adds a wrinkle for policymakers that could push back against a near-term reversal in rate policy. For the time being, it appears that the Fed will be content with a “steady as she goes” mindset.
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