By Robert Lutz
In the latest display of economic resilience, U.S. employers added a substantial 216,000 jobs in December, surpassing November’s addition of 173,000 jobs. The unemployment rate held steady at 3.7%, marking the 23rd consecutive month below 4%. This robust job growth indicates a strong labor market, even as the Federal Reserve contends with high interest rates.
Despite these positive indicators, the report suggests challenges for the Federal Reserve’s inflation reduction efforts. Average hourly wages increased by 4.1% compared to last year, a rise from November’s 4% increase, complicating the Fed’s objective to lower inflation to 2%.
Overall, the December jobs report reflects a robust economy with ongoing job creation, rising wages, and moderating inflation. This suggests the potential for the Fed to achieve a “soft landing,” avoiding a severe recession while controlling inflation.
However, public sentiment about the economy remains negative, a point of focus in the upcoming 2024 elections. Despite a decline in inflation and a strong labor market, many Americans still feel economic strain due to lingering high prices. Surveys reveal a significant disconnect between the economy’s health and public perception, with most consumers viewing the economy negatively and reporting increased expenses.
Consumer spending has continued robustly, supported by wage growth outpacing inflation over the past year. This spending, vital for U.S. economic growth, remained strong in various sectors including retail, online shopping, dining, and travel throughout much of 2023.
The jobs report also included some cautionary elements. Job gains for October and November were revised down by 71,000. Job growth in December was concentrated in certain industries, with notable additions in leisure and hospitality, healthcare, and government. From October to December, the average monthly private-sector job growth was the lowest since mid-2020.
The labor force participation rate decreased to 62.5% in December, the lowest since February. A drop of 676,000 in the labor force was the largest since January 2021. This decline puts pressure on employers and could lead to higher consumer prices as companies adjust to increased labor costs.
Despite predictions of a recession due to the Fed’s interest rate hikes starting in March 2022, the economy has remained resilient with sustained job creation and low unemployment. Total job additions for 2023 reached 2.7 million, a healthy figure though lower than 2022’s 4.8 million.
As the job market stabilizes, the need for signing and retention bonuses may decrease. The Fed’s rate hikes have brought borrowing costs to a 22-year high, aiming to curb inflation. Consumer prices in November were up 3.1% from the previous year, significantly lower than the 9.1% peak in June 2022. The Fed has paused rate increases since July, anticipating rate cuts in the future.
However, the strong job and wage growth reported may delay the Fed’s planned interest rate reductions. The journey to achieve 2% inflation remains challenging, with potential rate cut delays extending into the latter half of the year.
Employers continue to face difficulties in filling job vacancies. State-level minimum wage increases may prompt more automation, price hikes, and reduced operation hours in some sectors. The struggle to hire full-time workers persists, with job candidates seeking higher wages and specialized positions remaining challenging to fill. Read the US government’s Employment Situation Summary Here.
