Labor market still raking
Strong job gains and rising wages keep Fed rate cuts on hold.
Bottom Line
Nonfarm and private payrolls rose by a stronger-than-expected pace in December, and the unemployment rate held steady at a robust 3.7%. Average hourly earnings soared by a faster-than-expected rate of 0.4% month-over-month (m/m) and 4.1% year-over-year (y/y). In addition, ADP private payroll hiring hit a 4-month high in December, initial weekly jobless claims hit an 11-week low last week and Challenger job cuts hit their second lowest level of 2023 in December.
No immaculate disinflation and pivot Collectively, this suggests the Federal Reserve should be in no rush to cut interest rates in March. The strength of this week’s labor market data throws cold water on the consensus view the economy is heading into a mild recession later this year and that the Fed will cut interest rates six times over the course of 2024. We believe the economy is headed toward the mythical soft landing, with perhaps three cuts in the second half of this year.
Strong headline payroll gains in December Nonfarm payrolls rose by a stronger-than-expected 216,000 jobs in December (consensus at 175,000, Federated Hermes at 186,000). But previously reported November and October gains were revised down by a combined 71,000 jobs, so the adjusted payroll growth of 145,000 jobs last month was softer than consensus expectations. Moreover, payrolls have been revised down in 10 of the past 12 months for a cumulative loss of 427,000 jobs.
Same story with private payroll gains, which rose by a stronger-than-expected 164,000 jobs in December (consensus at 130,000). But with November and October revised down by a combined 55,000 jobs, the adjusted gain of 109,000 jobs in December was below consensus. The difference between nonfarm and private hiring was due to a sizable gain of 52,000 government jobs in December, with 37,000 of those hires coming at the local level.
Chinks in the armor Flipping the coin over reveals some labor market data deteriorated last month. Household employment lost 683,000 jobs, reversing the strong November gain of 586,000 and marking the worst monthly decline since April 2020. Labor impairment (U-6) ticked up to 7.1%, and the participation rate declined sharply to 62.5%. Hours worked ticked down to 34.3, and temporary hiring lost jobs for the 11th consecutive month.
Bad news is good news? This morning’s ISM Services Index for December plunged from 52.7 in November to a weaker-than-expected 50.6 (consensus at 52.5). A few tenths lower would signify economic contraction. Stocks initially soared on this release as investors apparently linked it to the beneath-the-surface details from the employment report discussed above, keeping hopes alive for a dovish Fed.
Important labor market indicators are generally strong across the board:
- ADP private payroll survey December payrolls expanded by a stronger-than-expected 164,000 jobs (consensus at 125,000)—the strongest gain since August’s 180,000—compared with November’s gain of 101,000. Job stayers experienced their slowest wage growth in two years, up only 5.4% y/y in December. Those who changed jobs saw increases of 8.0%.
- Initial weekly jobless claims Both the weekly and four-week moving average declined to 11-week lows last week, the former to 202,000 claims and the latter to 207,750. For the week ended December 23, continuing claims hit an 8-week low of 1.855 million. Some of this strength may have been related to the holiday season, so patience is appropriate to see if this noise dissipates.
- Challenger job cuts December layoffs of 34,800, the second-lowest total this year, declined 24% from November and 20% from a year ago. The retail sector cut more than 6,400 jobs last month (19% of total layoffs). Seasonal retail hiring is at its lowest level in a decade.
- Job Openings & Labor Turnover Survey (JOLTS) November job openings (which lag by a month) declined to their lowest level since early 2021, falling to a lower-than-expected 8.79 million job openings (consensus at 8.82 million), down 0.7% from an upwardly revised 8.85 million in October and down 27% from a record 12.027 million job openings in March 2022. There are now 1.4 job openings for every unemployed worker (just off the lowest since September 2021), down from a peak of 2.0 in March 2022. With 3.47 million voluntary quitters in November, the quits rate fell to a new cycle low of 2.2%, which suggests workers are less confident today in their ability to find another job. This metric peaked at 3.0% in April 2022.
Wage inflation rises while hours worked declines Average hourly earnings rose by a faster-than-expected 0.4% m/m gain in December (consensus at 0.3%), which annualizes to an above trend 4.8% pace. The Fed would like to see this metric stabilize at 3%. On a y/y basis, wages ticked up to a faster gain of 4.1% (consensus at 3.9%). Meanwhile, average weekly hours worked ticked down to 34.3 in December, a cycle low that dates back to April 2020. Each decline of 0.1 hour worked is the equivalent of cutting an estimated 350,000 jobs from the economy. This is important, as employers tend to cut hours before they cut staff.
Unemployment rate flat, labor impairment rate rises and participation rate falls Household employment (an important leading employment indicator) lost 683,000 jobs in December (compared with a gain of 586,000 jobs in November), marking its single worst month since April 2020 at the depth of the Covid recession. The number of unemployed people rose by 6,000 in December, compared with a decline of 181,000 in November.
The unemployment rate (U-3) remained at 3.7% in December The labor impairment rate (U-6) ticked up to 7.1% in December from 7.0% in November, above the cycle low of 6.5% in December 2022. The civilian labor force plunged by 676,000 jobs in December, down sharply from the gain of 404,000 jobs in November. As a result, the participation rate plunged to 62.5%, down sharply from 62.8% in November. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery narrows The unemployment rate for highly educated workers was unchanged at 2.1% in December for the fourth consecutive month, down from 2.2% in August but still above September 2022’s cycle low of 1.8%. The rate for workers with less education improved to 6.0% in December from 6.3% in November, though this metric remains above its 31-year low of 4.4% in November 2022.
Sector details mixed:
- Temporary help (an important leading employment indicator) lost 33,000 jobs in December for the eleventh consecutive month.
- Manufacturing added only 6,000 jobs in December (consensus at 5,000), versus a gain of 26,000 jobs in November and a loss of 38,000 jobs in October, likely due to the 6-week UAW strike. The ISM manufacturing index has been in contraction territory in each of the past 14 months at 47.4 in December.
- Construction added 17,000 jobs in December, compared with 6,000 jobs in November and 27,000 jobs in October. The near tripling of mortgage rates from 3% to a 22-year high of 8% over the past two years has impaired construction activity.
- Retail added 17,000 jobs in December, up from a decline of 24,000 jobs in November and a gain of 17,000 jobs in October. Retail is not enjoying a robust Christmas season.
- Leisure & hospitality added 40,000 jobs in December, up from 12,000 new jobs in November and 25,000 in October. This sequential increase likely accounted for the improved employment picture for less-educated workers last month.