U.S. employers added 223,000 jobs in December, a slowdown from previous months but still a solid gain that suggests the economy can avoid sliding into recession next year. The unemployment rate fell another notch, to 3.5%, matching a 53-year low.
Overview: Moderating Growth and Inflation Point to Soft Landing
December’s job growth, though the lowest in two years, capped a second straight healthy year for the job market — one in which the nation regained all 22 million jobs it lost to the COVID-19 pandemic. And the unemployment rate ended the year at the lowest level since 1969, according to the Labor Department’s report Friday.
In recent months, though, the job market’s sizzling rebound from the pandemic recession late last year has cooled somewhat. Economists have forecast that monthly hiring would slow from its breakneck pace earlier last year because so many Americans had returned to work. “We should see moderation,” said Neil Dutta, head of economics at Renaissance Macro Research. The December numbers, he said, were “very close to expectations and consistent with the view that the economy is downshifting to a more moderate pace of growth.”
This could benefit the economy next year. As Federal Reserve Chair Jerome Powell noted last month, the modest slowing of job and economic growth means inflation pressures should continue to ease. The Fed’s aggressive interest rate hikes last year were intended to cool the economy and curb high inflation. Powell has warned that the Fed’s hikes will likely lead to higher unemployment and potentially a recession.
So far, though, steady consumer spending and the robust labor market have kept the economy expanding. And many economists think a recession, if there is one, will prove relatively mild. “We have got a chance of getting through this without a recession,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s still a very uncomfortable landing, but the plane is landing on the runway.”
Lower inflation has raised hopes on Wall Street that the Fed may cut rates later this year to support the economy. Investors sent stocks surging after the jobs report came out.
Business Sector Continues Steady Job Growth
In December, job gains were widespread across industries. Business services added 63,000 jobs, retailers gained 9,000 and construction added 28,000. Manufacturers added 8,000. Leisure and hospitality was unchanged in December, after sizable job gains earlier last year. Transportation and warehousing cut jobs. Temporary staffing added 21,000 jobs, up from November but below a gain of 35,000 in September.
Government employment remains far below its pre-pandemic levels, however. The Labor Department reported that the decline in government employment in recent months was driven by a reduction of 42,000 jobs in New York in November and December, reflecting the end of the state’s hiring for the 2022 midterm election.
More broadly, state and local governments have withstood economic turbulence over the past couple years and are now finding their financial footing. “State and local governments are very much in restoration mode,” said Carl Tannenbaum, chief economist at Northern Trust. “The crisis has passed, revenues are coming in strongly and public services need to be backstopped.”
Still, some analysts expect economic uncertainty and slowing job growth to weigh on state budgets next year. [“Some states are finally restoring jobs lost during pandemic budget cuts, but many more will decide not to fill vacancies,” said Lucy Dadayan, senior economist at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. “States have historically cut jobs and spending during economic downturns, further contributing to job losses and spending cuts.”] (https://www.usatoday.com/story/money/2024/01/02/2024-economic-outlook-brightens/72055290007/)
Steady Spending Provides Cushion but Risks Remain
American consumers, buoyed by rising wages and solid household finances, continue to spend steadily despite high inflation and other economic headwinds.
Their resilience has kept the economy growing even as higher borrowing rates discourage homebuying and other big-ticket purchases and constrict commercial activity. The nation’s gross domestic product has declined in each of the past two quarters — one informal benchmark for recession. “Yet neither sharp rate hikes by the Federal Reserve nor still-high inflation has brought consumer spending to a standstill,” notes The Washington Post. “To the contrary, surging prices and rising interest rates have barely made a dent.”
Consumer spending drives roughly 70% of U.S. economic activity. Many Americans still have money saved from pandemic relief checks, swollen home equity and wage increases in a tight labor market. Supply chain backlogs are easing, discounting more goods. And holiday sales rose at a brisk pace.
Still, economists warn many threats menace the economy [Per CNBC]: Prices continue rising faster than wages nationwide. Paychecks are shrinking when adjusted for inflation. Consumers have to dip more into savings to maintain their lifestyles, leaving less cushion for unexpected expenses. “And once safety nets like savings begin to fray, then the risk of recession rises.”
| Category | Nov 2023 | Dec 2023 | Change Dec-Nov |
|---|---|---|---|
| Total Nonfarm Jobs | 263K | 223K | -40K |
| Unemployment Rate | 3.6% | 3.5% | -0.1 pp |
| Labor Force Participation | 62.1% | 62.3% | +0.2 pp |
Job and unemployment estimates from U.S. Bureau of Labor Statistics. Table by Claude.
So while steady consumer demand, easing inflation and a still-resilient labor market point to a soft economic landing, analysts stress risks still threaten a downturn next year: “We still see recession risks. The Fed is still hiking,” said Nancy Vanden Houten with Oxford Economics. “The economy is slowing.”
Fed Rate Hikes to Continue Slowing Economy
Most economists expect the Fed to raise its benchmark rate by an additional three-quarters of a point in the coming months to around 5.25%, up from near zero a year ago. Yet with inflation showing signs of easing, the central bank has been dialing down the size of its rate hikes and could suspend them after March. “We’re going to need to see several months more of data,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in an interview Thursday. By late 2023 or early 2024, she said, “I think we will be in good shape to say we’ve done enough.”
Fewer Fed hikes would lessen the risk of a recession. But even moderate hikes will likely continue slowing consumer and business borrowing and spending. Already the housing market has been pummeled as average 30-year mortgage rates top 6.5%, up from below 3% a year ago. “We expect another mild pullback in activity and employment in early 2024 in response to the tightening already in the pipeline,” said Michael Gapen, head economist at Bank of America.
Still, Mester and other Fed officials have stressed their rate policies aim to engineer a slowdown to bring inflation back near their 2% annual target — without triggering job losses and a recession. “We have a good shot at a soft, or at least a softish, landing,” she said. “I think that’s very plausible.”
Outlook for 2024: Steady Growth With Continued Risks
With inflation showing signs of cooling and consumers still spending steadily, the economy appears headed for slower but still solid growth in 2024, economists say.
Most analysts foresee the economy expanding about 1% this year, downshifting from estimated growth around 2.5% in 2022. Meanwhile, unemployment may rise to around 4.5% — up slightly but still low by historical standards. “We have long looked for GDP growth to step down notably” in 2023 and 2024, analysts at Goldman Sachs wrote this week. While recession risks make the outlook “unusually murky,” they added, “the most likely outlook remains slow growth.”
Still, threats remain, from additional Fed rate hikes to global headwinds — particularly energy shortages stemming from Russia’s war in Ukraine. And stubbornly high inflation could continue squeezing consumers.
“There are a number of stabilizers still at work in the economy,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. But risks will accumulate as rate hikes keep slowing activity. “It is not going to feel good through this slowdown.”
Yet so far, steady consumer spending and a healthy labor market are keeping recession at bay. Barring unexpected shocks, moderate growth appears the most likely path for 2024. As Mark Zandi said, “We have got a chance of getting through this without a recession.”
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