Payroll growth slowed in December but was still better than expected, a sign that the labor market remains strong even as the Federal Reserve attempts to slow economic growth.
Nonfarm payrolls increased by 223,000 for the month, above the Dow Jones estimate of 200,000, while the unemployment rate fell to 3.5%, 0.2 percentage point below expectations. Job growth registered a slight decline from a 256,000 increase in November, which was revised down 7,000 from the preliminary estimate.
Wage growth was lower than expected in a sign that inflation pressures may be easing. Average hourly earnings increased 0.3% for the month and increased 4.6% from a year ago. Relevant estimates of growth were 0.4% and 5%.
By sector, leisure and hospitality come out on top with 67,000 additional jobs, followed by healthcare (55,000), construction (28,000) and social assistance (20,000).
Stock market futures rose after the release as investors look for signs that the jobs picture is cooling and driving inflation lower as well.
“From a market perspective, the main thing they’re responding to is the softer average number of gains per hour,” said Drew Matos, chief market strategist at MetLife Investment Management. “People turn that into a one-two pony, and that trick is whether or not that’s inflationary. The unemployment rate doesn’t matter that much if average hourly earnings keep falling.”
The relative strength in job growth comes despite repeated efforts by the Federal Reserve to slow the economy, and the labor market in particular. The central bank raised the benchmark interest rate seven times in 2022 by a total of 4.25 percentage points, with more hikes likely on the way.
Primarily, the Fed is looking to bridge the supply-demand gap. As of November, there were about 1.7 available jobs for every available worker, an imbalance that has remained constant despite the Fed’s rate hikes. Strong demand pushed wages higher, although they often did not keep up with inflation.
The decline in the unemployment rate came as the labor force participation rate rose to 62.3%, still a full percentage point lower than it was in February 2020, the month before. COVID-19 pandemic success.
A more comprehensive measure of unemployment that takes into account discouraged workers and those taking part-time jobs for economic reasons also fell, dropping to 6.5%, the lowest reading ever in the data set going back to 1994. The headline unemployment rate is tied for the lowest level since 1969.
The domestic worker count, used to calculate the unemployment rate, showed a significant gain for the month, rising by 717,000. Economists have been watching the household survey, which generally lags behind the number of establishments.
The United States heads into 2023 when most economists expect at least a shallow recession, the result of Fed tightening policy aimed at curbing inflation still near its highest level since the early 1980s. Still, the economy closed out 2022 on a strong note, with GDP growth tracking at a rate of 3.8%, according to the Atlanta Federal Reserve.
Fed officials indicated at their latest meeting that they were encouraged by recent inflation readings, but that they need to see continued progress before they are convinced that inflation is coming down and they can mitigate higher interest rates.
And as things stand, the markets are pretty much expecting the Fed to raise interest rates by another quarter of a percentage point at its next meeting, which ends on February 1st.
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