The US economy added 223,000 jobs in December, wrapping up a year of remarkably persistent job growth that defied rising interest rates and predictions of an impending recession. The unemployment rate dropped to 3.5%, matching a 53-year low.
Key Details from the December Jobs Report
- 223,000 jobs were added in December, higher than economist forecasts of 200,000
- Unemployment rate dropped to 3.5%, from 3.6% in November
- Labor force participation rate remained unchanged at 62.1%
- Average hourly earnings rose 0.3% for the month and were up 4.6% for the year
“The December jobs numbers showed the resilience of the US labor market in the face of rising interest rates and predictions of an impending recession,” said Jane Smith, chief economist at Research Group Inc. “Job growth slowed somewhat from the breakneck pace earlier in 2022, but held up better than expected. This caps off the strongest year for job creation since 1978.”
The December report from the Labor Department paints a picture of an economy that keeps defiantly churning out jobs even though the Federal Reserve has been raising interest rates aggressively to try to cool things down. In doing so, the Fed is hoping to reduce inflation by slowing the economy and choking off demand for workers.
Unemployment Remains Near Historic Lows
The unemployment rate edged down to 3.5% in December, matching a 53-year low reached in July. The jobless rate has come down steadily over the past year as openings continue to vastly outnumber job hunters. Available jobs numbered 10.5 million in late December.
“The incredibly low unemployment rate is the result of historically high job openings,” said David Jones, economist at Capital Economics. “While job growth is slowing, labor demand remains extremely strong.”
This imbalance between job postings and available workers has fueled rapid wage gains across the economy. Average hourly earnings were up 4.6% in December compared with 12 months earlier. While still-high inflation eats away much of those pay gains in real terms, rising wages can perpetuate inflation pressures if companies pass on the higher labor costs to customers by raising prices.
Some key details from the December jobs report:
| Category | December | November | 12-month change |
|---|---|---|---|
| Nonfarm payrolls | +223,000 | +256,000 | +4.5 million |
| Unemployment rate | 3.5% | 3.6% | Down 1.1 pct pts |
| Labor participation rate | 62.1% | 62.1% | Unchanged |
| Average weekly hours | 34.4 | 34.4 | Unchanged |
| Average hourly earnings | +0.3% | +0.4% | +4.6% |
Source: US Bureau of Labor Statistics
“The consistency of monthly job gains well above 200,000 along with the low unemployment rate shows employers are still hiring even as the pool of available workers shrinks,” Smith said.
Most economists expect job growth to continue to pull back in 2024 but remain positive as services activity holds up. Consensus estimates look for average monthly gains of around 175,000.
Job Growth Concentrated in Services, Construction
The strongest job gains in December came in leisure and hospitality (+67,000), health care (+55,000), social assistance (+22,000) and construction (+28,000). Manufacturing eked out a slight gain (+8,000) while retail jobs fell by 20,000, reflecting overstaffing heading into the holidays.
“We’re seeing hiring tilt toward services and away from goods as consumer spending rotates more toward experiences and less on physical things,” Jones said.
Construction has been boosted by unseasonably warm weather allowing more outdoor activity. Mild temperatures drove gains in specialty trade contractors like plumbing and electrical services.
The Fed’s interest rate hikes have hit housing hard, with construction of single-family homes down sharply. But the still-hot commercial real estate market is picking up the slack. Office construction posted a decent gain in December.
“While the Fed would certainly like to see the red-hot job market cool off substantially, policymakers have to be encouraged by the shift toward service sector jobs,” said Ryan Sweet, chief US economist at Oxford Economics.
Sweet expects monthly job additions to slow to around 160,000 by the second half of 2024. “But given the strength in domestic demand, I don’t think we’ll see outright declines,” he said.
Recession Fears Ease Heading into 2024
Coming into 2023, the consensus view was that a recession was virtually inevitable. Aggressive Fed rate hikes, inflation eroding consumer spending power, the end of fiscal stimulus and other factors had markets braced for a significant economic pullback.
But as 2022 progressed, resilient consumer demand kept growth positive and the feared downturn failed to materialize. Now heading into 2024, a soft landing looks more likely, though risks remain.
“Despite the Fed’s best efforts, we aren’t seeing signs of a major turndown in economic activity,” Smith said. “As long as households keep spending and businesses keep posted job openings, we could achieve that elusive soft landing.”
However, she cautioned that inflation remains too high for the Fed’s comfort. More interest rate hikes are likely in early 2024 until policymakers see clear evidence that price pressures are abating. This could still tip the economy into a mild recession.
Consensus forecasts look for real GDP growth to slow from an estimated 1.7% in 2023 to just 0.7% in 2024. Job growth is expected to downshift as well, but remain positive. Oxford Economics sees average monthly gains slowing from 386,000 in 2022 to 210,000 in 2023 and 155,000 in 2024.
Outlook Hinges on Path for Inflation, Rates
Continued strength in the job market heading into the new year is undoubtedly positive news. But the outlook for 2024 still contains plenty of uncertainty.
“The path of inflation and the Fed’s response to it remains the biggest wild card,” Sweet said. “If we don’t see a meaningful decline in wage growth and core inflation, the Fed will keep raising rates and likely induce a recession.”
Markets are currently anticipating rate cuts later in 2024 as inflation ebbs, growth slows and unemployment ticks higher. But policymakers have stressed they want to keep rates elevated for some time to ensure price stability.
“The Fed has been clear that rates need to stay higher for longer, even in the face of slower growth,” Jones said. “It’s too early to expect the Fed to ride to the rescue at the first sign of economic weakness. That could lead to premature market optimism.”
So while recent data justifies cautious optimism on the economic outlook, risks remain tilted to the downside. An inflation surprise forcing more Fed rate hikes combined with plateauing job and wage growth would likely bring on recession.
“We aren’t out of the woods yet,” Smith said. “But there is a visible path to a soft landing if conditions unfold close to expectations.”
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