Payroll growth decelerated in December, but was still better than expected, a sign that the labor market remains strong even as the Federal Reserve tries to slow economic growth.
Nonfarm payrolls rose 223,000 for the month, above the Dow Jones estimate of 200,000, while the unemployment rate fell to 3.5%, or 0.2 percentage points in below expectations. Employment growth was down slightly from November’s gain of 256,000, which was revised down 7,000 from the original estimate.
Wage growth has been below expectations, indicating that inflationary pressures may be easing. Average hourly earnings rose 0.3% for the month and 4.6% from a year ago. The respective estimates were for growth of 0.4% and 5%.
By sector, leisure and hospitality lead with 67,000 additional jobs, followed by healthcare (55,000), construction (28,000) and social assistance (20,000).
Stock market futures rallied after the release as investors look for signs that the employment situation is cooling and also leading to lower inflation.
“From a market perspective, the main thing they’re reacting to is the lower average hourly earnings number,” said Drew Matus, chief market strategist at MetLife Investment Management. “People are turning this into a one-trick pony, and that thing is whether it’s inflationary or non-inflationary. The unemployment rate doesn’t matter much if average hourly earnings keep falling.”
The relative strength in job growth comes despite the Fed’s repeated efforts to slow the economy, the labor market in particular. The central bank has raised its benchmark interest rate seven times in 2022 for a total of 4.25 percentage points, with more likely increases along the way.
Primarily, the Fed seeks to bridge a gap between demand and supply. In November, there were about 1.7 job vacancies for every available worker, an imbalance that has persisted despite Fed rate hikes. Strong demand pushed wages up, although they generally did not keep up with inflation.
The December wage data, however, could provide some encouragement that the Fed’s efforts are having an impact on demand.
“There are signs that things are moving in the right direction. We are seeing the impact of the blunt tools of monetary policy,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office. “I don’t think that’s going to deter the Fed from a few more increases in the future, but it’s definitely encouraging to see wage moderation.”
The decline in the unemployment rate came as the labor force participation rate edged up to 62.3%, still a full percentage point below what it was in February 2020, the month before the Covid-19 pandemic hit.
A more comprehensive measure of unemployment that takes into account discouraged workers and those in part-time jobs for economic reasons also declined, falling to 6.5%, its lowest level on record in a data set dating back to 1994. The overall unemployment rate is tied at the lowest since 1969.
The household employment number, used to calculate the unemployment rate, showed a huge gain for the month, rising by 717,000. Economists have been monitoring the household survey, which has generally lagged the number of establishments.
The United States heads into 2023 with most economists expecting at least a shallow recession, the result of Fed policy tightening aimed at curbing inflation, still near its all-time high 1980s. However, the economy ended 2022 on a strong note, with GDP growing at a rate of 3.8%, according to the Atlanta Fed.
At their last meeting, Fed officials noted that they were encouraged by the latest inflation readings, but that they will need to see continued progress before they are convinced that inflation is falling and that they can mitigate rate hikes.
As things stand, markets largely expect the Fed to hike rates another quarter-percentage point at its next meeting, which ends Feb. 31. 1.
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