In the final report of 2023, the Labor Department indicated that the U.S. economy added 216,000 jobs last month. The unemployment rate remained at 3.7%, while labor force participation dropped to 62.5%. However, wage inflation continues to show signs of “stickiness”, with wage growth accelerating to 4.1% over the past year.
Is This What a Soft Landing Looks Like?
216,000 Jobs Added in December While Unemployment Remained at 3.7%
Top Takeaways from the Report
2023 Ended with Another Month of Strong Job Growth
The U.S. economy ended 2023 on a strong note. Employers added 216,000 jobs in December. This is up from the revised growth of 173,000 the previous month and is much higher than the consensus forecast that 164,000 had been added in the month.
The labor market added a total of 2.7 million jobs in 2023, which is lower than the last few years but is stronger than the years preceding the Covid pandemic.
The unemployment rate remained unchanged at 3.7% in December. This marks the 23rd month in a row that the U.S. unemployment rate has been below 4%. Unemployment increased dramatically in 2020, as the economy shut down and 22 million people lost their jobs. But over the past four years the labor market has returned back to an economic environment defined by low unemployment and strong demand for workers. In 2024, the labor market should continue to normalize and the unemployment rate is expected to trend higher.
While many of the indicators in the jobs report reflected strength in the labor market, the labor force participation rate showed that there is still difficulty in getting workers off the sidelines and back into the workforce. The labor force participation rate dropped to 62.5% in December, down from 62.8% the previous month.
Four years ago, before the shock of pandemic disruptions, the labor participation was at 63.3%. Ideally, the participation rate should return to that pre-pandemic level as workers come back to jobs. But the recent weakness in labor participation may be a sign of a new-normal in the labor force that the market needs to adjust to.
Wage growth was another less encouraging indicator in December. Average hourly earnings growth remained unchanged at 0.4% on a month-to-month basis and increased to 4.1% on a year-to-year basis in December. This is up from 4.0% growth the previous month.
Strong wage growth is a double-edged sword for the economy. For much of 2022 and into early 2023, wage growth couldn’t keep up with price increases - which strained financial conditions for many families. Wages are now growing faster than inflation, which is giving some relief to consumers. However, until wage growth returns to its long-term average of 3.0% it runs the risk of reigniting high inflation and causing a “wage-price spiral”, similar to what happened in the 1970s.
One of the most important economic trends of 2023 was the continued drop in inflation, as price pressures eased and overall economic conditions normalized. However, the path back to the Fed’s goal of 2% annual price increases could be bumpy. Markets are still sensitive to unexpected economic shocks and these shocks can drive higher volatility.
An example of this is the recent aggression in the Middle East and the impact on shipping routes in the Red Sea. This will drive up transportation costs in the region and could increase prices of goods around the world.
Another example of the sensitivity of markets is housing and real estate. Housing prices jumped early in the pandemic, as low interest rates combined with changing consumer demand. As the Fed increased interest rates in 2022 and 2023, housing demand dropped and home prices fell. Mortgage rates are dropping again, which should support greater housing demand. But if rates drop too much in 2024, we could see reheating of the housing market which could push overall inflation back up.
Growth by Industry
Industries experienced mostly positive job growth during December. Those leading the gains were education and health services (+74,000); government (+52,000); and leisure and hospitality (+40,000). By contrast, the industries with the declines in jobs were mining and logging (-1,000); and other services (-1,000). Private payrolls increased by 164,000, with goods-producing industries increasing by 22,000 and service-providing industries increasing by 142,000.
The Bottom Line
The final jobs report of 2023 shows that the economy continues to return back to normal. But the path back to normal may continue to be windy and bumpy in 2024. Job growth in December was strong and the unemployment rate remained low, but labor participation contracted and wage inflation accelerated.
In their most recent meeting in December, the Federal Reserve indicated that they will pivot away from the rate increases of 2022 and 2023 to rate decreases in 2024 and beyond. By the end of this year, the Fed predicts that they will cut rates three times, by around 75 basis points.
However, Jerome Powell, the Chair of the Federal Reserve, has stressed that they will be data dependent in determining their ultimate rate decisions. While no single jobs report can be considered in isolation, today’s report shows that the Fed needs to continue to be cautious about the manner and timing of rate cuts in 2024.
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