December Jobs Forecasts Point to a Strong but Cooling Labor Market

Forecasts for the December jobs report predict that job growth slowed but remained healthy last month after strong gains in November.

Investors will be watching Friday’s data for signs that the labor market is cooling to a sustainable level without having incurred major damage as a result of high interest rates. The U.S. economy is forecast to have generated 160,000 new jobs in December, according to FactSet’s consensus.

That would be more evidence of a “soft landing,” meaning the Federal Reserve is successfully engineering a sustained reduction in inflation pressures without tipping the economy into recession. If that turns out to be the case, Fed rate cuts could be around the corner. It’s a delicate balance for the central bank to strike, and there’s no guarantee of success. A monthly jobs print that’s too hot or cold could rattle investors and upend traders’ expectations for rate cuts in the first half of the year. As of Jan. 3, the bond market was pricing in a 67% chance of a rate cut at the central bank’s March meeting, according to the CME FedWatch Tool.

Friday’s data will also be a crucial test for the stock market, which has slipped in the first days of 2024 after ending the year with a blistering rally.

José Torres, senior economist at Interactive Brokers, is also expecting job gains of 160,000 in December. He isn’t anticipating major weakness in the labor market. He says corporate balance sheets are strong: “Are [firms] going to hire like crazy? No, but they’re also not going to lay off workers.”

December Jobs Report Consensus Estimates

• Nonfarm payroll employment to rise 160,000 vs. the 199,000 increase in November, according to FactSet.
• Unemployment rate to rise to 3.8% from 3.7% in November.
• Hourly earnings to rise 0.3% on a monthly basis, down from 0.4% in November.

What to Expect From the December Jobs Report

While it hasn’t been a straight line, the overall jobs market is slowing down. For December, nonfarm payroll employment is forecast to rise by 160,000, according to FactSet’s consensus estimate. That’s lower than November’s headline number of 199,000 and significantly lower than jobs growth at the beginning of 2023, when the three-month rolling average of gains was hovering well above 300,000. The unemployment rate is projected to rise to 3.8% from 3.7%, while hourly earnings growth is expected to slow from 0.4% to 0.3% on a monthly basis.

But a slowdown in jobs growth doesn’t necessarily point to a faltering labor market, and strategists are optimistic about the year ahead. A separate measure of job openings released Wednesday showed that job vacancies dropped to their lowest level since 2021 in November.

“The healthy starting point of still-high job openings and a low layoff rate coupled with fading recession fears should support steady job gains in 2024,” Goldman Sachs economists wrote in a research note last month.

Government, Services Sectors Drive Job Gains

Torres is anticipating weak gains from goods-producing sectors like manufacturing and construction in December’s data. He expects stronger numbers from the services sector, especially in the leisure and hospitality categories. “We’re going to get a push from the non-cyclical areas, which have been driving the gains lately,” he adds, “like education, healthcare, and government.”

Analysts from Bank of America also pointed to government jobs as a major source of growth in the labor market last month, noting that state and local education jobs remain far below their pre-pandemic levels.

Will the Fed Cut Rates Soon?

As of Jan. 3, the bond market was pricing in roughly six interest rate cuts in 2024. Whether those cute materialize (and when) will depend on the path of the labor market and of the economy as a whole.

In a Wednesday research note, analysts from Bank of America wrote that a headline jobs number in line with their forecast of 175,000 (slightly higher than consensus) would “likely keep the Fed thinking the labor market is gradually coming into better balance.”

They add that a headline number of 200,000 jobs or better, along with better-than-expected results in other areas like hourly earnings, could force the market to push back its expectations for rate cuts. On the other hand, a print of 150,000 jobs or lower could increase the likelihood of cuts coming sooner.

“I’m thinking that the report is going to be a little too strong relative to Fed easing expectations,” says Torres. That could “incrementally delay the Fed’s first rate cut at a time when market sentiment is buckling a little bit,” he adds. “I’d expect that to contribute to a more pronounced selloff in the short term.”