Strong December Jobs Report Surprises, but Overall Labor Market Is Slowing


Closing out 2023, the U.S. economy continued to show healthy gains in hiring, according to the Bureau of Labor Statistics’ December jobs report. But under the surface, the trend still points toward a gradual slowdown, suggesting an economic soft landing remains very much in play.

While the December report showed that the economy added 216,000 jobs (significantly more than the 160,000 that were expected), economists stress the importance of looking beyond one month’s readings. “Things are not as rosy as the headline number,” says Jeffrey Roach, chief economist for LPL.

The details of the report leave the door open for the Federal Reserve to cut interest rates in 2024. In the bond market, expectations are that the Fed could lower rates as soon as March. An overly strong labor market could delay those cuts.

December Jobs Report Key Stats

  • Total nonfarm payrolls increased by 216,000 vs. a downward-revised 173,000 in November.
  • The unemployment rate was unchanged from 3.7% in November.
  • Average hourly wages grew by 0.4% to $34.27 after rising 0.4% in November.

Job Growth Is Slowing Despite Surprising Headline Number

Morningstar chief U.S. economist Preston Caldwell points out that on a three-month basis, job growth is again slowing down. Nonfarm payroll growth fell to 1.3% on an annualized basis over the three months ending in December, compared with 1.7% in the prior three months. “We would not characterize today as a ‘hot’ jobs report by any means,” he says.

In the private sector, the economy added 164,000 jobs. “That’s a healthy rate, but it’s certainly not gangbusters,” says Roach. “It’s also consistent with the story that things have slowed down this year.”

Monthly Payroll Change

Downward revisions to October and November’s payroll numbers also indicate a softer labor market than Friday’s topline number suggests, Roach says. “Markets may be focusing too much on the solid job gains in December and not enough on the downward revisions in October and November,” Caldwell explains. He expects more downward revisions next month.

Unemployment Rate

Hiring Slows In the Healthcare and Government Sectors

Government hiring picked up in December, as did hiring in the healthcare, social assistance, and construction categories, according to the BLS. The transportation and warehousing sectors saw losses.

However, Caldwell notes that over the past three months, healthcare hiring has fallen to a 2.8% annualized growth rate from a 4.0% growth rate over the prior period.

Selected Payroll Categories

Three-month increase.

Jobs Report Shows Wage Growth Ticking Up

While wage growth has gone up slightly over the past three months, Caldwell says that the metric is still trending down over the past year. The small spike “seems to be temporary,” Roach says.

Monthly Wage Growth

When Will the Fed Cut Rates?

Futures markets were pricing in a roughly 75% chance of a March interest rate cut in the aftermath of Friday’s report, according to data from the CME FedWatch tool. Overall, markets expect roughly six cuts by the end of December.

Expectations for December 2024 Federal Reserve Meeting

Probabilities (%) for federal-funds rate level.

Caldwell also expects the first rate cut in March, and he adds that the labor market’s slowdown could “add pressure for Fed rate cuts if it persists.”

On the other hand, Roach says the labor market’s slowdown is indicative of an uncertain path for the economy, and that could push cuts back. “I think the report lowers the probability of the Fed cutting in March,” he says. “My view is that the Fed will not begin cutting as soon as the market expects.”

Canada’s labor market missed expectations for job gains, confirming a slowdown in the economy at the end of last year.

The number of employed people was essentially unchanged in December, while the unemployment rate held steady at 5.8%, Statistics Canada reported Friday in Ottawa. That fell short of forecasts for a gain of 15,000 positions, according to the median estimate in a Bloomberg survey of economists.

Wage increases for permanent employees accelerated to 5.7% over the prior year, higher than expectations for a 5.4% rise, and up from 5% a month earlier. That’s the strongest pace since January 2021.

Overall, the report shows an economy in which growth is cooling because of high borrowing costs. That gives policymakers some room to consider lowering interest rates in the coming months. Still, wage growth remains an inflation risk if it persists.

The Canadian dollar briefly fell to the lowest intraday level since Dec. 19 after the release of Canadian and US employment data — the latter was stronger than economists’ forecasts — then recovered. The loonie was trading up at C$1.3309 per US dollar at 10:29 a.m. in Ottawa.

Bonds initially slumped after the jobs figures were released, then reversed. The benchmark Canada two-year yield declined more than 4 basis points to 4.008%.

“Today’s sluggish results suggest that the softening seen in the broader economy is finally catching up with the job market,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors. He expects the jobless rate to push above 6% in coming months and “eventually take some steam out of wage gains.”

Labor Force Growth Stalls

Canada has one of the world’s fastest rates of population growth because of high levels of immigration. However, employment growth has been slower than the expansion of the labor force in recent months.

The population aged 15 and older grew by 74,000 in December, on par with the average monthly population growth in 2023 of 79,000. Yet this time, it didn’t translate into significant growth in the labor force.

The employment rate — the proportion of the working-age population with jobs — continued to trend lower. It fell 0.2 percentage points to 61.6% in December, the fifth decline in the past six months, and down from its recent high of 62.5% in January 2023.

Last year, the economy averaged about 36,000 new jobs per month, yet the unemployment rate rose 0.8 percentage points — highlighting how quickly the pool of workers is growing.

The participation rate fell 0.2 percentage points to 65.4% in December. That’s down from a recent peak of 65.7% in June, and most of the decline was due to a drop in the youth participation rate.

Total hours worked rose 0.4% every month in December and were up 1.7% from a year earlier. That followed a 0.7% month-over-month drop in November.

“This is a classic mixed bag report with some stronger-than-expected news (hours worked, wages) and some weaker (employment, participation),” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors. The bank is still forecasting a first interest rate cut from the Bank of Canada in June — in line with market expectations.

This is the only jobs report before the first-rate decision of this year by the central bank on Jan. 24.

All 29 forecasters in a Bloomberg survey expect the central bank to keep the overnight rate unchanged for a fourth consecutive meeting at 5%, which is seen as the likely end point in this tightening cycle.

Job gains were led by professional, scientific, and technical services, as well as health care and social assistance. Wholesale and retail trade saw the biggest job losses, suggesting a slowdown in consumption. December is the third consecutive month where employment fell in this sector.

Regionally, employment rose in British Columbia, Nova Scotia, Saskatchewan, and Newfoundland and Labrador, while it fell in Ontario and was little changed in the other provinces.

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