The U.S. economy added 216,000 jobs in December, closing out an extraordinary year that saw an increase of 2.7 million in total employment and a record 167 million Americans employed.
The U.S. economy added 216,000 jobs in December, closing out a year that saw a record 167 million Americans employed
During the past year, the unemployment rate averaged 3.6% and closed the year at 3.7% in the best year for labor since the 1950s, according to data released Friday by the Bureau of Labor Statistics.
More important, average hourly earnings increased by 0.4% in December and rose by 4.1% over the past year.
An easing in inflation implies that U.S. households are experiencing wage increases that are more than 1% above the inflation rate. Those gains will continue as inflation eases to 2.5% or below by the end of the year, bolstering household balance sheets and boosting consumption.
To be sure, there is always plenty of seasonal noise in the December jobs estimate. Given the recent downward revisions in the employment report, we would anticipate that December will also be revised downward in the coming months.
In the report released Friday, the Bureau of Labor Statistics indicated a downward revision of 71,000 jobs in November and October. That implies a net increase in total employment of 145,000, which was in line with the RSM forecast of a 135,000 increase in total employment.
In addition, the unemployment rate held steady despite a decline in 676,000 jobs inside the household survey, which the BLS uses to estimate the unemployment rate. The establishment survey, by contrast, is used to estimate the top-line change in growth.
Solid, albeit cooling, job creation is likely to be the primary narrative in the labor market in the first half of the year, and that dynamic can be seen inside the composition of hiring over the past few months.
We anticipate that job creation will slow toward the break-even rate of roughly 75,000 per month, which is necessary to keep employment stable given demographic changes in the labor market.
While there will be months this year in which total employment comes in lower than that metric, we do not anticipate a significant increase in the unemployment rate. That stability will keep the labor market historically tight and wage growth well above pre-pandemic era levels.
Policy implications
The trend in cooling employment and wage growth last year is part of a large policy mosaic that has partially resulted in significantly lower inflation.
In our estimation, the Federal Reserve’s current policy rate of 5.25% to 5.5% is too restrictive. We expect that the Fed will be comfortable with the downward trajectory of inflation as seen in the personal consumption expenditures index, which declined to 2.8% through the third quarter. That easing will create the conditions for the first of four 25 basis-point rate cuts that we forecast starting in June.
Should the labor market continue to cool and unemployment rise, then the Fed is well positioned to put a floor under the economy.
Although the central bank policy stance acknowledges risks in both price stability and maximum sustainable employment, that stance would most likely shift quickly toward employment and growth should hiring cool.
The data
The composition of hiring was broad based in December, in contrast with the past few months, featuring a 164,000 net increase in private sector employment. Those gains were driven by 74,000 new jobs in education and healthcare, 40,000 in leisure and hospitality, and 52,000 in government hiring.
Higher-paying construction and goods-producing jobs advanced by 17,000 and 22,000, respectively. Manufacturing had an increase of 6,000 jobs, with retail trade experiencing a gain of 17,000, information 14,000, professional business services 13,000 and financial services 2,000.
Temporary hiring declined by 33,000 positions, which reflects the continuing shortage of workers across the economy.
While some observers will note the sustained increase in health care, social assistance and education, we would counter with the fact that “meds and eds” will be a crucial stabilizer across the economy as it transitions to a slower pace of growth this year.
Aggregate hours increased by 0.8% on the month and the labor force participation rate eased to 62.5% on the back of that seasonal noise inside the household survey estimate.
The median duration of unemployment increased to 9.7 weeks, which indicates that it is taking slightly longer for workers to get a new job.
The takeaway
The normalization of the labor market last year functionally brought an end to the pandemic-era disruption that at its peak in April 2020 pushed the unemployment rate to 14.9% and spurred a significant fiscal and monetary response.
The 2.7 million jobs created last year and a 3.6% average unemployment rate both point toward a rock-solid American household that will continue to support growth.
While the composition of growth over the past few months has narrowed, we expect those gains to broaden out in the second half of the year as rate cuts by the Federal Reserve stoke the appetite for risk in residential construction and as the surge in construction employment turns into a boom in manufacturing hiring.
