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.”

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.

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.

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.

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.

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.”