Outpacing expectations

The U.S. labor market added 216,000 jobs in December,¹ outpacing economists’ expectations and higher than November’s gain of 173,000, closing out 2023 with a more robust labor market than economists expected.

Global Investment Strategist for J.P. Morgan Wealth Management, Shawn Snyder, noted that the labor market remained strong despite indicators that suggest it should be waning.

“The labor market remains in solid shape with the U.S. economy adding 216,000 jobs in the month of December,” said Snyder. “Leading economic indicators continue to suggest that the pace of job growth should slow over the next couple of quarters, but thus far, the labor market hasn’t seemed to get the message.”

Unemployment rates and growth

The overall unemployment rate remained unchanged at 3.7%. The labor force participation rate, at 62.5%, and the employment-population ratio, at 60.1%, both decreased by 0.3% in December, and showed little or no change over the year.

Hiring was revised down in both October and November. For all of 2023, employers added 2.7 million jobs, or an average monthly gain of 225,000 jobs. This was lower than the increase of 4.8 million in 2022 (with an average monthly gain of 399,000), but a bigger gain than in the years preceding the pandemic.

“Moving forward, we intend to keep a close eye on the weekly jobless claims number, which logs the number of people filing for unemployment insurance,” said Snyder regarding the slowing pace of job growth. “We would be more worried about a recession if we were to see a sustained rise in that metric, but there appears to be little to worry about at the moment.”

Government, health care and leisure and hospitality led the month’s job gains. Government jobs gained 52,000 last month. On average, government added 56,000 jobs per month in 2023, more than double the average monthly gain of 23,000 in 2022. The economy added 38,000 jobs in the health care space. Job growth in health care averaged 55,000 per month in 2023, compared with the average monthly gain of 46,000 in 2022.²

Employment in social assistance rose by 21,000 in December, while construction jobs added 17,000. Transportation and warehousing lost jobs. Leisure and hospitality added 40,000 jobs, about the same number as the prior month. The industry added an average of 39,000 jobs per month in 2023, less than half the average gain of 88,000 jobs a month in 2022. Employment in this sector is about 1% below its pre-pandemic February 2020 level.³

Employment in manufacturing, retail trade and professional and business services also added jobs.

Wage growth ticked up slightly last month. Average hourly earnings, an important measure for inflation, rose 0.4% to $34.27. Over the past 12 months, average hourly earnings have increased by 4.1%.⁴

The number of unemployed Americans who want a job climbed to 5.7 million in December and was up by 514,000 overall in 2023.

Rate implications

The labor market is a key indicator in the Federal Reserve’s interest rate hiking decisions as it continues to battle inflation which is still running above the Fed’s 2% target. At the most recent Federal Open Market Committee (FOMC) meeting last month, the Fed held its benchmark overnight interest rate steady at 5.25% to 5.5%, and indicated it is likely done with its tightening campaign, penciling in three rate cuts in 2024.

But, as Snyder put it, the report was “sort of ho-hum.” Yet it did have some brief impact on rate cut expectations.

“Following the report, the market pushed back its timing of a first rate cut from the Fed, but then the ISM services index came in soft and essentially negated the market’s initial reaction to the jobs report,” said Snyder. “It would not be surprising to see markets whipsawed a bit in coming months as investors remain on edge about the ultimate rationale for lower interest rates. Will it be because the Fed accomplished its mission? Or will it be because the economic slowdown is picking up steam? We lean towards the former, but it’s going to take some time to confirm that.”

With the labor market demonstrating continued resiliency, the Fed might not be in any rush to initiate a rate cut. But, there are signs the job market is cooling – the number of job openings fell in November to 8.79 million from 8.85 million in the prior month, according to the Bureau of Labor Statistics’ Job Openings and Labor Turnover Summary report released this week.⁵

But overall labor demand is still solid, which, combined with the steady easing in inflation (the Consumer Price Index came in at 3.1% in November compared to a year earlier and down from over 9% in 2022),⁶ has stirred optimism that the Fed can execute an economic soft landing – lowering inflation without a severe slowdown and attendant spike in unemployment.

In the press conference following the Federal Open Market Committee decision last month, Fed Chair Jerome Powell said that while “there’s little basis for thinking the economy is in a recession now… there’s always a real possibility there will be recession in the next year.”

The December inflation report is set to be released January 11.