The December employment report was generally encouraging. Nonfarm payroll growth slowed modestly but remained solid with a 223K monthly gain, according to Wells Fargo. More importantly for Fed officials worried about the inflation outlook, wage growth cooled in December, and the labor force participation rate ticked higher for both prime age (25-54) and older (55+) workers. Despite the directional improvement in labor supply, the labor market remains exceptionally tight. The unemployment rate fell two tenths of a percentage point to 3.5%, matching its lowest level on record since 1969. It will take more than just this report to convince the FOMC that supply and demand in the labor market are in healthy balance.
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Cooler Hiring and a Bump in Labor Supply
The December jobs report brought further signs that the labor market is beginning to soften, but remains incredibly strong. Nonfarm payrolls increased by 223K in December, not far off the
Bloomberg consensus forecast of 202K. Revisions to the previous two months were slightly negative on net. The 223K new jobs added in December was the slowest pace of job growth since December 2020, when a surge in COVID cases was weighing on the U.S. economy. Job growth was generally broad-based and was led by leisure & hospitality (+67K), healthcare (+55k) and construction (+28K). Information, which includes many tech-related industries, was an exception with payrolls slipping by 5K.
Beyond the downshift in hiring, there were additional signs in the establishment survey that labor demand is gradually cooling. Employment in temporary help services declined by 35K in December and has fallen by 111K since July. The average number of weekly hours worked declined by 0.1 hour to 34.3 in December and also has been falling in recent months. With 12 months of complete data, nonfarm payroll growth averaged 375K per month in 2022, but all signs point to a material slowdown in job growth in 2023.
In an encouraging sign for wage growth slowing without economic activity having to pull back sharply, the availability of workers improved in December. The labor force participation rate rebounded to 62.3%, with increases for both prime age (25-54) and older (55+) workers. However, the overall participation rate remains below the level reached back in March and is still a full point lower than
it was before COVID. The incomplete recovery has kept the jobs market exceptionally tight. The unemployment rate fell back to 3.5% in December, matching its lowest level on record since 1969. The drop came despite a sharp rebound in the household measure of employment (+717K). The household data continues to paint a more sobering picture of job growth over the past year, but the establishment and household data are now more aligned.
FOMC Weighing 25 bps or 50 bps for February Meeting
The combination of gradually slowing nonfarm payroll growth, a cooler reading on average hourly earnings and a jump in the labor force increases the odds that the FOMC further slows the pace of monetary policy tightening at its upcoming meeting on January 31-February 1. We believe 50 bps remains a distinct possibility, and, in addition to looking at next week’s CPI report, we will be listening to Fed officials’ comments closely in the coming weeks to ascertain what would swing them one way or the other. That said, the pace of tightening has become secondary to the ultimate destination.
Regardless of the exact path, we continue to expect the fed funds target range to reach 5.00-5.25% this spring and remain there through the remainder of the year.
