U.S. hiring cooled in December to the lowest pace in two years, but the labor market remained resilient in the face of higher interest rates, scorching-hot inflation and mounting recession fears.
Employers added 223,000 jobs in December, the Labor Department said in its monthly payroll report released Friday, topping the 200,000 jobs forecast by Refinitiv economists. Still, it marks a slight deceleration from the downwardly revised gain of 256,000 in November and is the worst month for job creation since December 2020. The unemployment rate unexpectedly fell to 3.5%, a five-decade low.
“No doubt the labor market has been able to withstand prolonged rate hikes better than many expected,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “Remember though that monetary policy acts on a lag, so it’s likely an if and not a when for a slowdown in hiring. The Fed minutes made it clear that rates will remain high for all of 2023, so investors should prepare for a bumpy ride.”
Wage growth also cooled in December, with average hourly earnings rising just 0.3% from a month earlier and 4.6% from the previous year. That is likely a reassuring sign for the Federal Reserve as it tries to wrestle stubbornly high inflation under control with the most aggressive rate-hike campaign since the 1980s. Policymakers see wages as a pivotal indicator of inflationary pressures in the economy.
Stocks rose following the better-than-expected report as the wage data boosted investor hopes that the Fed will soon pause its rate hikes.
Job gains were broad-based in December, with leisure and hospitality leading the way in hiring, adding 67,000 new workers. That was followed by health care (54,700), construction (28,000) and social assistance (19,700).
However, some sectors saw payrolls shrink last month: Employment services shed 39,700 workers, and advertising and related services lost 4,200.
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While monthly jobs data is always important, the Fed has been closely watching the report for signs the labor market is starting to slow down from its frenzied pace as policymakers try to wrestle inflation, which is still about three times higher than its pre-pandemic average, back to 2%.
“The December jobs report was stronger than expected, with solid job growth and the unemployment rate falling back to a half-century low,” said Bill Adams, chief economist for Comerica Bank. “The Fed will see this jobs report as a green light for further rate hikes in early 2023.”
Fed officials already approved seven straight increases in 2022, including four back-to-back 75-basis-point hikes, raising the federal funds rate to a range of 4.25% to 4.5%, the highest since 2007. Policymakers have said they intend to leave rates elevated for “some time” to avoid a potential inflation resurgence.
Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.
There have already been a series of notable layoffs over the past few months: Amazon, Apple, Meta, Lyft and Twitter are among the companies either implementing hiring freezes or letting workers go. That could soon bleed into the broader labor market; Fed Chairman Jerome Powell has made it clear that policymakers anticipate job growth will slow and unemployment could climb as they raise interest rates higher, but he has argued that an alternative where prices soar unchecked is worse.
“There will be some softening in labor market conditions,” Powell told reporters in December. “And I wish there were a completely painless way to restore price stability. There isn’t.”