The latest jobs report shows hiring cooled in December after a year of strong growth, but the labor market remains healthy overall. Employers added 164,000 jobs last month, exceeding economists’ forecasts. The unemployment rate held steady at 3.5%, still near a 50-year low.
Hiring Beats Expectations
Private payrolls grew more than expected in December, adding 164,000 jobs compared to the 155,000 estimate, according to ADP data. Growth was driven by the service sector, especially in leisure and hospitality.
“This is a really solid number given some of the weakness we’ve started to see in consumer spending,” said AnnElizabeth Konkel, economist at Indeed.
The ADP figures come ahead of the closely-watched official jobs report on Friday, which is forecast to show nonfarm payrolls rose by 200,000 last month while the unemployment rate held at 3.5%.
Year in Review
Hiring boomed for most of 2023 before showing early signs of cooling towards the end of the year. The U.S. economy added 4.5 million jobs over the past 12 months.
“Last year will likely go down as having posted one of the strongest annual gains in history,” said Nick Bunker, economic research director for North America at the Indeed Hiring Lab.
The red-hot labor market has given workers more leverage, leading to strong wage growth. Average hourly earnings were up 5.6% in November from a year earlier.
Many economists expect job growth to further decelerate in 2024 as higher interest rates slow demand across the economy.
“We still expect positive job growth in 2024, but slower than last year,” said Sarah House, senior economist at Wells Fargo.
Impact on Federal Reserve Policy
The steady unemployment rate may assure Fed officials that their interest rate hikes over the past year have started to cool inflation without significantly disrupting the job market. However, policymakers have indicated they still have more work to do in tamping down price pressures.
“Inflation remains a problem and the Fed will raise interest rates again early this year before hitting pause to assess the impact of last year’s significant policy tightening,” said Sal Guatieri, senior economist at BMO Capital Markets.
Most economists expect the Fed to lift rates by a quarter point at its next meeting in February, followed by another such increase in March. Markets are currently pricing in rate cuts late this year as growth slows, but policymakers have pushed back on those expectations.
Sector Breakdown
| Sector | December Job Gains |
|---|---|
| Goods-producing | 15,000 |
| Construction | -1,000 |
| Manufacturing | 19,000 |
| Service-providing | 149,000 |
| Trade/transportation/utilities | 62,000 |
| Professional/business services | 35,000 |
| Leisure and hospitality | 38,000 |
Job growth occurred across most industries last month. Manufacturing, trade, transportation, hospitality and professional services posted solid gains. Construction employment declined slightly.
The service sector accounted for over 90% of new hires in December. It has led job creation throughout the economic expansion as demand shifts towards services.
Within services, the transportation industry showed resilience despite challenges from higher fuel prices and supply chain difficulties. Warehousing employment has risen this year due to healthy online retail sales.
Meanwhile, the tech sector announced high-profile layoffs towards the end of 2022. However, technology job cuts have so far remained isolated and the industry’s unemployment rate remains extremely low at 1.3%.
Outlook for Early 2024
Economists predict job creation will continue at a slower pace in early 2024. For the full year, forecasters on average expect payroll gains to decelerate from about 375,000 per month to 150,000. The unemployment rate is seen rising to 4.2% by the fourth quarter.
“We expect job growth to ease back further as the economy slows, but we don’t anticipate an outright decline in employment if the Fed engineers an orderly slowing in activity,” said Michael Gapen, head economist at Bank of America.
There are some concerns the high number of available jobs and persistent labor shortages could fuel another pickup in wage growth. This could threaten the Fed’s progress in cooling inflation. Policymakers will be monitoring the data closely in the coming months.
While hiring faces headwinds going forward, the labor market retains momentum from last year’s exceptionally strong gains. For now, the jobs picture remains positive overall.
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