December Jobs ReportU.S. Hiring Slows but Remains Solid in December

Monthly change in jobs

+600,000 jobs

+223,000

in December

+400,000

+200,000

Dec.

’21

March

’22

June

Sept.

Dec.

+600,000 jobs

+223,000

in December

+400,000

+200,000

Dec. ’21

March ’22

June

Sept.

Dec.

The U.S. economy produced jobs at a slower but still comfortable rate at the end of 2022, as higher interest rates and changing consumer habits downshifted the labor market without bringing it to a stop.

Employers added 223,000 jobs in December, the Labor Department reported on Friday, about in line with economists’ expectations but lower than the average in recent months. The unemployment rate ticked down to 3.5 percent, back to its low point from before the pandemic.

“If the U.S. economy is slipping into recession, nobody told the labor market,” said Chris Varvares, co-head of U.S. economics for S&P Global Market Intelligence. “The report this morning highlighted the step-down in growth relative to 2021, but it’s to a level that’s still almost double what would be trend growth in employment.”

The showing brought total job creation for the year to 4.5 million as the economy continued to recover from the shutdowns early in the pandemic.

The recent slowdown is a sign that the Federal Reserve’s campaign to quell inflation may finally be constraining the labor market, which has remained a standout even as the rest of the economy started to shudder. Although the extremely low unemployment rate suggests that workers still have the upper hand, the Fed predicts that the rate will rise to about 4.6 percent by the end of this year, as its interest rate increases force companies to retrench.

Employers had been eager to hire workers when they could find them and loath to get rid of them through most of 2022. Layoffs and initial claims for unemployment insurance have remained extremely low, while the gap between the number of available workers and listed jobs is far larger than its historical average.

That post-pandemic rebound has weakened in recent months, as sectors that had been powered by the stay-at-home lifestyle have begun to slow hiring and in some cases shed jobs.

Industries that have benefited from resurgent consumer demand, such as hotels, restaurants and entertainment venues, have struggled to attract the workers necessary to operate at full capacity. But that may be changing, as household savings accumulated during the pandemic have dwindled and fast inflation has pushed Americans to take on extra work.

The share of people working or looking for work ticked up slightly to 62.3 percent in December — about where it has been all year — as more than 400,000 people entered the labor force.

Change in jobs in December 2022, by sector

+78,000 jobs

Education and health

Leisure and

hospitality

+67,000

+28,000

Construction

+9,000

Retail

+8,000

Manufacturing

State and local

government

+2,000

Business

services

–6,000

Education and health

+78,000 jobs

Leisure and hospitality

+67,000

Construction

+28,000

Retail

+9,000

Manufacturing

+8,000

State and local government

+2,000

Business services

–6,000

Employers in December continued to add jobs in a variety of sectors, though there were some signs of slowing in industries including manufacturing.

Leisure and hospitality businesses, which are still catching up from the pandemic’s upheaval, added a healthy 67,000 jobs, below its average of 79,000 per month in 2022. But the sector was still 5.5 percent below its prepandemic level, with more than 900,000 fewer workers. The sector has faced challenges filling open positions and has continued to struggle with high turnover.

Health care employment increased by 55,000, as the sector continued to show robust growth. There were notable gains in hospitals and ambulatory health care services, including physicians’ offices and home health care services. The sector added 49,000 per month on average last year.

Construction businesses added 28,000 jobs, above its average of 19,000 jobs added per month last year despite high mortgage rates. Hiring in the sector has defied economists’ expectations as contractors continue to work through backlogs.

Manufacturing showed stable but low hiring as the sector continued to show signs of slowing. The sector added 8,000 total jobs, driven by hiring among durable goods manufacturers, including makers of transportation equipment. But employment at nondurable goods manufacturers fell by 16,000.

Retail trade added 9,000 jobs to close out the busy holiday season, lower than the 16,000 jobs the sector added per month on average last year. Notable declines occurred in general merchandise stores; building material and garden supply stores; electronics and appliance stores; and clothing and clothing accessories stores. The overall job growth reversed a decline in November. (As with all sectors, the figures are adjusted to offset normal seasonal variations.)

For investors and policymakers alike, bad news may be good news when it comes to the job market.

Stocks jumped on Friday after new data showed that hiring continued at a healthy pace in December, but wages rose more slowly than economists had forecast, taking the pressure off the potential impact they will have on overall inflation.

The S&P 500 rose 2.3 percent. After a sluggish start to 2023, Friday’s rally meant the index ended the first trading week of the year with a modest gain.

The Labor Department reported that employers added 223,000 jobs in December and the unemployment rate dropped to 3.5 percent. Average hourly earnings picked up by 4.6 percent, which was less than forecast and below the November figure of 4.8 percent, which was revised downward.

Investors have been focused on labor market data as they try and predict the path of interest rates. The Federal Reserve last year raised interest rates rapidly in an attempt to pull down stubbornly high inflation and slow the economy.

Toward the end of the year, data began to suggest that inflation may have started to moderate. However, the labor market remains a crucial piece of the puzzle, with intense competition for workers pushing wages higher and stoking inflation. In other words, a strong labor market has been bad for the Fed’s mission to bring down inflation.

So the easing pace of wage growth was welcomed on Friday by stock investors eager for the end of the Fed’s interest rate increases, which have raised costs for companies and helped drag stock prices lower. Lisa Cook, a Fed governor, said in a speech on Friday that “recent data suggest that labor-compensation growth has indeed started to decelerate somewhat over the past year.”

Investors have begun to revise their expectations downward for how high Fed officials will raise rates and how long they will keep borrowing costs elevated.

The two-year Treasury yield, which is sensitive to changes in Fed policy, tumbled on Friday, trading at just under 4.3 percent. Investors are now betting on a quarter-point increase in rates at the Fed’s next meeting in February, a step down from December’s half-point rise, which was already a drop from the jumbo three-quarter-point increases that came at the previous four meetings. The Fed’s key policy rate is currently set in a range of 4.25 to 4.5 percent.

The Fed has warned investors of getting ahead of themselves and making assumptions about the end of its campaign against inflation. Rising stock prices and falling borrowing costs based on signs of falling inflation enrich investors, increasing economic demand that can end up juicing inflation.

“An unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability,” noted minutes of the Federal Reserve’s December meeting released this week.

Thomas Barkin, the president of the Richmond Fed, repeated the central bank’s commitment to tackling inflation on Friday, referencing an episode 50 years ago in which price increases took off and stayed high for years. “The experience of the ’70s showed that if you back off on inflation too soon, it comes back stronger,” he said.

For some investors, that raises the possibility of a more severe economic downturn, as the Fed’s determination to vanquish inflation risks tipping the economy into recession.

Analysts have been lowering their expectations for the next round of corporate earnings, forecasting the first earnings contraction since the third quarter of 2020, according to the research company FactSet.

“With the record-low unemployment rate indicating that there is still so much work ahead of them, Fed policy rates are set to rise above 5 percent within just a few months, and a hard landing looks to be the most likely outcome this year,” said Seema Shah, the chief global strategist at Principal Asset Management. “The recession clock is ticking.”

Jeanna Smialek and Ben Casselman contributed reporting.

The Labor Department’s report showing strong-but-slowing job growth and signs of progress in bringing down inflation further buoy President Biden’s optimistic case for the American economy this year.

“Today’s report is great news for our economy and more evidence that my economic plan is working,” Mr. Biden said in a written statement on Friday morning. “The unemployment rate is the lowest in 50 years. We have just finished the two strongest years of job growth in history.”

Mr. Biden kicked off 2023 with a renewed message of hope that inflation is set to cool without the economy falling into recession, the so-called soft landing that Federal Reserve officials have said they are trying to achieve with their sustained and aggressive campaign of raising interest rates.

The December jobs report contained positive news for the White House on both ends of that equation. It showed continued strong job gains, the gauge Mr. Biden prefers to cite when emphasizing the resilience of the economy in the face of global turmoil and persistently high inflation, though those gains are slowing. “This moderation in job growth is appropriate,” Mr. Biden said, “and we should expect it to continue in the months ahead.”

The report also showed a deceleration in wage growth, a sign that Fed officials are beginning to succeed in curbing price increases. More workers joined the labor force, a development administration officials had hoped to see for months.

“The data are signaling ongoing positive momentum in job growth and moderating wages,” Rubeela Farooqi, the chief U.S. economist for High Frequency Economics, wrote in a research note. She added that the Fed could slow its pace of rate increases at its next meeting, another development the administration would likely welcome, because it would ease the brakes on economic growth.

Mr. Biden leaned into his optimistic economic message at the start of the year. “After a rough few years, we’re seeing really bright spots,” he said at the start of a cabinet meeting at the White House on Thursday.

Perhaps the most worrying sign for the White House in Friday’s report was relatively slow growth in manufacturing, a sector Mr. Biden has repeatedly sought to grow with legislation and executive actions.

Republicans focused their response on declining wage growth, blaming Mr. Biden for prices increasing faster than wages for many American workers.

“What do American workers want?” Tommy Pigott, the rapid response director for the Republican National Committee, wrote in a news release. “Inflation to come down and wages to go up. What is Biden delivering? Falling wages and surging prices.”

On Friday, the president’s aides were jubilant about the report. Neera Tanden, the White House staff secretary, wrote on Twitter that “the economy is pretty damn strong.”

Ron Klain, the White House chief of staff, was more emphatic. “Today,” he wrote on Twitter, “the US hit the LOWEST UNEMPLOYMENT RATE IN 50 YEARS.”

Federal Reserve officials have been waiting for clear evidence that the demand for workers is falling back in line with America’s limited supply of available applicants. Friday’s job report offered a glimmer of that slowdown, but not yet enough of one to be decisive.

Employers hired 223,000 people in December, more than economists expected but fewer than the previous month. Importantly for the Fed, average hourly earnings picked up by 4.6 percent, less than forecast and a slowdown from a revised-down 4.8 percent in November.

Wage growth is slowing down

Year-over-year percentage change in earnings vs. inflation

+8%

CONSUMER

PRICE INDEX

+7.1%

in Nov.

+6

AVG. HOURLY

EARNINGS

+4.6%

in Dec.

+4

+2

2019

2020

2021

2022

+8%

CONSUMER

PRICE INDEX

+7.1%

in Nov.

+6

AVG. HOURLY

EARNINGS

+4.6%

in Dec.

+4

+2

2019

2020

2021

2022

Central bankers have two goals, maximum employment and stable prices, and they would typically be happy about a superstrong labor market like the one that exists today. But inflation touched a 40-year high last summer and remains elevated, and Fed policymakers think it would be tough to wrestle it back down to an acceptable pace with a job market that is so out of whack. As companies pay their workers more to retain them and attract new ones, they are likely to also charge more to protect their profits.

As a result, the Fed has increasingly focused on the job market as the part of the economy that needs to slow for it to successfully wrangle rapid price increases.

Services inflation outside of housing remains elevated, and “that’s really a function of the labor market, largely,” Jerome H. Powell, the Fed chair, said during his December news conference. “The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening.”

That makes Friday’s moderate slowdown a step in the right direction — but likely not sufficient deceleration.

Mr. Powell has suggested that wage growth needs to cool notably for inflation to return to normal: He said in late November that measures including average hourly earnings were “about one and a half percent higher” than what would be consistent with stable inflation.

Fed officials have also suggested that job growth should be slowing down. By the estimates they look at, the nation only needs to add about 100,000 jobs per month to accommodate population growth over time, Mr. Powell said late last year.

As the labor market cools off, those who already have jobs might be fine, as long as employers don’t start to lay people off in large numbers.

But those who’ve already been looking for work for a while could have a tougher hill to climb.

At the moment, the share of the work force that has been unemployed for more than 15 weeks is 1.9 million, seasonally adjusted, near the lowest it has ever been — as is a broader measure of unemployment that includes people working part time who’d like to work full time, and people who’d like a job but haven’t looked for one recently.

The number of people claiming unemployment benefits, however, has been creeping up, even as new claims remain low. That suggests that people who lost a job in the past few months are having a harder time finding a new one.

Take Amanda Browning, 31, who last worked in March 2022 when her contract with a staffing firm doing recruitment and onboarding for a large financial company ended. She loves working in human relations, and received her bachelor's degree in the subject in 2019. But human resources is also among the first functions to be cut back when employers go into contraction mode.

Now, after submitting 400 applications — which she has tracked in a spreadsheet — Ms. Browning is open to almost anything in administration or marketing. But her options aren’t infinite, since she had to move back in with relatives about an hour west of Abilene, Texas, and relocating for a job is too big a financial risk. And job opportunities seem to be dwindling.

“I check Indeed regularly,” she said of the recruitment site, “and every week it seems like there’s less and less, and just the same jobs that I’ve seen every day before.” But she tries to stay positive.

“Mind-set is huge,” she said. “I keep telling myself that with every rejection, it wasn’t meant for me. The right job is out there.”

Even before the release of figures for December, it was already apparent that 2022 was an impressive year for job creation — and that 2023 would probably be the opposite.

The gain of 223,000 last month brought the total for the year to 4.5 million jobs, pending revisions. That is the second most on record, trailing only the 2021 total of 6.7 million.

The employment base surpassed its February 2020 level last summer, but it remains millions of jobs short of where it might have been if prepandemic trends had continued — and last month may prove to be among the last during which the labor market recovers ground.

The Federal Reserve projects that its battle to quell inflation through raising interest rates will push unemployment up to 4.6 percent, which equates to roughly one million lost jobs.

“We’re not expecting to see job losses right now, but how do you get to one million jobs fewer over the next year?” asks Christine Cooper, chief U.S. economist at the real estate data firm CoStar. “We’re going to have to see some negative numbers.”

Slowing is already apparent in the sectors that saw the most outsize growth during the pandemic as people shopped in lieu of in-person experiences: transportation and warehousing, manufacturing and retail.

Health care has continued to add workers quickly, but the outlook for employment in leisure and hospitality, as well as in hotels and restaurants, is more uncertain. Those sectors remain significantly below their early 2020 peaks.

Most banks and large credit agencies expect a recession in 2023. That view is offset by a sentiment among a budding crop of economists and major investors who see a firm chance that the economy will avoid a recession, or scrape by with a brief stall in growth — a hopeful outcome widely called a soft landing.

What seems most likely is that even if a soft landing is achieved, it will be smoother for some households and businesses and rockier for others, Talmon Joseph Smith reports for The New York Times.

The downside is likely to be felt most by cash-starved small businesses and by workers no longer buoyed by the savings and labor bargaining power they built up during the pandemic.

Most major U.S. banks have reported that checking balances are above prepandemic levels across all income groups. Yet the cost of living is higher than it was in 2019 throughout the country. And depleted savings among the bottom third of earners could continue to ebb while rent and everyday prices still rise, albeit more slowly.

At the same time, there will be growing pressure on small businesses, which have less wiggle room than bigger companies in managing costs and are more likely to be affected by the tightening of credit.