Michelle ThompsonFriday’s employment report marked a fitting conclusion to a year that defied expectations.
According to the Bureau of Labor Statistics, the US economy added 216,000 jobs in December, with the unemployment rate holding steady at 3.7%. These numbers exceeded the anticipated net gain of 160,000 jobs and highlighted a year of remarkable resilience in the job market.
Around this time the previous year, many experts had predicted that the Federal Reserve’s efforts to combat inflation through interest rate hikes would result in mounting job losses and potentially push the economy into a recession.
However, the labor market’s enduring strength has actually fueled consumer spending and economic growth over the past 12 months. Despite 11 rate hikes by the Fed, which raised the benchmark interest rate by 5 percentage points in less than two years, the job market has cooled down without a significant increase in unemployment. This unprecedented scenario was described by Julia Pollak, chief economist at ZipRecruiter, as something that has “never happened before.”
The Federal Reserve seems to be successfully achieving a “soft landing,” wherein they are bringing down inflation without plunging the economy into a recession. Nonetheless, the situation remains uncertain.
The recent jobs report also indicates that the labor market and the broader economy are at a pivotal moment, with the outcome largely dependent on interest rates coming down from their 22-year highs.
“We are observing a substantial slowdown in the labor market,” Pollak explained, noting that job figures for October and November were revised down by a total of 71,000 jobs. “The underlying rate of job growth is around 150,000 to 140,000, and it will continue to gradually decline in the upcoming months until the Fed eases its monetary policy.”
Federal Reserve Chair Jerome Powell has consistently emphasized the need for the labor market to cool down and achieve a better balance between available jobs and the number of people seeking employment. His recent acknowledgment of the US job market’s improved balance and positive inflation data have raised optimism that the Fed may consider rate cuts sooner rather than later. However, the strong jobs report and higher-than-expected wage gains of 0.4% monthly and 4.1% annually are likely to delay this prospect.
Andrew Patterson, Vanguard’s senior international economist, noted that “today’s report speaks to the challenging path ahead for the Fed’s journey back to 2% inflation,” which is the central bank’s target. He added that “the decision on when to implement the first policy rate cut is likely to be made in the second half of the year.”
A remarkable year for the labor market.
In 2023, the United States saw a net increase of approximately 2.7 million jobs, based on seasonally adjusted data from the Bureau of Labor Statistics (BLS). This translates to an average monthly net gain of 225,000 jobs.
This figure represents a notable decrease compared to the preceding year, as 2022 witnessed the addition of 4.79 million jobs, marking the second-highest annual total on record dating back to 1939. Furthermore, it is considerably lower than the record-breaking year of 2021 when the nation added 7.27 million jobs, as the country continued to recover from the significant job losses experienced during the Covid pandemic.
Nonetheless, the yearly addition of 2.7 million jobs aligns more closely with the job market conditions observed during the economic expansion that transpired in the decade prior to the pandemic.
Joe Brusuelas, RSM US principal and chief economist, reflected on this, noting that the December jobs report led to a net increase of 216,000 jobs, concluding an exceptional year in job creation. He pointed out that over the past year, unemployment averaged 3.6% and closed the year at 3.7%, marking it as the best year for labor since the 1950s.
In January of the previous year, the unemployment rate reached a low of 3.4%, a level not seen since May 1969, just two months before Neil Armstrong’s historic moon landing.
In April 2023, the unemployment rate for Black workers reached a record low of 4.7%. Furthermore, in June, the labor force participation rate for women in their prime working age (25-54 years old) reached an all-time high of 77.8%.
There are indications of potential concerns.
The recent employment gains were driven by robust hiring in various sectors, including government (up 52,000 jobs), healthcare (+37,700), social assistance (+21,200 jobs), construction (+17,000 jobs), and leisure and hospitality (+12,000 jobs).
However, this concentration of job growth in specific sectors also raises concerns. Over the past six months, 92% of all job gains were centered in just three sectors: healthcare, government, and leisure and hospitality, as noted by Julia Pollak. When considered for the entire year, this share was 76%, indicating a lack of broad-based job growth beyond these sectors.
Typically, job growth is more diversified across various industries, and the current scenario appears somewhat lacking in that regard, as Pollak pointed out. The recent labor turnover data showed a significant decline in hiring and quits, which are indicators of economic opportunities.
These signs may suggest a risk of the job market cooling down excessively in the coming months, and wage growth could potentially help counterbalance this trend. While average hourly earnings slowed from a 4.8% annual growth rate in December 2022 to 4.1% last month, the cooling of annual inflation (measured by the Consumer Price Index) from 6.5% in December 2022 to 3.1% as of November 2023 has improved real wage growth.
This positive development in real wage growth is beneficial for workers and the economy, reducing the risk of an early-year recession and bolstering consumer spending, demand, and business revenues. Additionally, high productivity levels have not been excessively inflationary, further contributing to a stable economic outlook.
