Jobs report preview: Strong close to year as wages remain elevated

 

We expect the December U.S. jobs report on Friday to show an increase in total employment of 220,000 positions, which would bring the total number of jobs created last year to roughly 4.53 million.

While such a gain would fall below the three-month moving average of 263,000 through the end of November, it would still be well above the 65,000 per month that we think the economy needs to meet labor demand.

With such a resilient labor market, one should expect wage gains to exceed a 5% annualized pace as employers pay a premium to attract and retain workers.

These two trends—rising employment and surging wages— highlight the challenge at the Federal Reserve: It needs to tame inflation, but to get there it needs more slack in the labor market, which will lead to softer demand and a softer pace of wage gains.

For that reason, the focus of policymakers on Friday will not be on annual job gains—our forecast implies no change in the unemployment rate of 3.7%—but instead on what we expect will be a 0.6% increase in monthly average hourly earnings and a 5.2% increase on a year-ago basis.

There is little sign that these gains will ease anytime soon. We anticipate that wages will move higher over the next three months as workers demand higher pay to offset inflation. Through the end of November, the three-month annualized increase in average hourly earnings reached 5.1%, up from 4.8% in October.

We expect the primary drivers of employment to continue where they have been, in service-sector jobs led by education and health, along with leisure and hospitality.

We anticipate another strong month in goods-producing jobs, construction and manufacturing. The rebuilding that has followed the hurricane season in the southeast and a warmer-than-expected winter will bolster overall demand for construction workers.

Finally, the recent hiring in state and local government, which bolstered the overall employment gains in November by 43,000 positions, will abate, and that provides some downside risk to our forecast of a net gain of 220,000 jobs.