First, the bottom line
- December’s employment release provided the cleanest data on underlying labor conditions that we’ve seen in some time, coming on the heels of back-to-back October and November reports that were skewed by hurricanes and strikes.
- More importantly, the December jobs report paints a picture of a solid labor market — one that’s normalized from its previously overheated state without stalling out.
- The strong jobs report is good news for the economy but serves up the latest obstacle for markets that had increasingly priced in a steady stream of rate cuts from the Fed through 2025, an outcome that’s looking increasingly unlikely.
- Short-term rates may be lower a year from now than they are today, but in the absence of a more pronounced loss of economic momentum or disinflationary impulse, the Fed’s likely to keep rates higher for longer.
By the numbers
- The December payroll gain came in much stronger than expected, as the economy notched 256,000 new jobs last month. Net revisions to the preceding two months of data were limited and didn’t materially alter that story. Forecasts had been for a much more modest but still quite solid gain of 165,000.
- While solid overall, those gains were overwhelmingly concentrated in service sector and government payrolls. Gains in construction were comparatively lackluster, while manufacturers shed workers last month. While the big picture is solid, the comparative challenged conditions in the manufacturing sector are still evident.
- Unemployment edged down to 4.1% — higher than both its cyclical low (3.4%) and its level a year ago but still holding in a relatively narrow range since the middle of last year.
- Average hourly earnings remain firm, dipping fractionally to 3.9%. While elevated compared to the comparatively weak wage gains of the decade leading up to 2020, it still reflects the lowest calendar year increase since the onset of the pandemic and is another sign of normalization.
Good news, bad news
- The crisp pace of job creation and modest improvement in the jobless rate reflect an economy that appears to have sustained its positive momentum into the end of the year. Recession risk has receded considerably while inflation has retreated from multidecade highs. There are still risks, but there’s also good reason that various measures of the consumer mood have improved.
- High prices are still a source of frustration, but they aren’t rising as quickly. Job creation has slowed, but employers are still hiring. Importantly, the economy also appears to have sidestepped the worst fears of a near-term recession and appears to be sustaining its momentum into 2025. That’s the good news.
- The bad news comes for those counting on a continuation of aggressive rate cuts by the Fed, the need for which has been called into doubt in recent months.
- For a time, policymakers had viewed cooling labor conditions as the greater risk, particularly as various inflation gauges were receding rapidly. More recently, that view has changed, as inflation has now seemingly become stuck above the Fed’s 2% target, while the expected ratcheting up of tariffs and stiffer immigration policies could be catalysts for inflation pressures to build anew in the coming year.
- The result is a Fed that’s walking a tightrope in the execution of rate policy in the near term and in managing expectations for what they may need –— or even be able — to do.
- Firm labor conditions and solid economic growth call into question the need for further cuts; the potential for a resurgence in inflation further limits the ability of the Fed to provide them.
- That’s a change in the outlook that hasn’t been lost on investors, with long-term yields rising in recent months while the stock market looks for catalysts to extend its strong performance since 2023. The December jobs report didn’t provide that answer.
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