Labor Market Softening Continues, But We Still Have a Long Way to Go

The labor market continued to slow in December, with 223,000 jobs added in the month, compared to revised growth of 256,000 the previous month. However, the unemployment rate once again dropped to 3.5% in December, down from 3.6% the previous month. This reflects a broad tightness in the labor market, even though some sectors are seeing weakness and experiencing layoffs. Wage inflation eased in December, dropping to 4.6% compared to 4.8% the previous month. This report gives some signs that inflationary pressure continues to slow even though it remains far too high.

Top Takeaways from the Report

December Job Growth Continues

The labor market continues to show signs of slowing in response to higher interest rates and tightening financial conditions. In December, the U.S. economy added 223,000 jobs. This is higher than the expectation that 200,000 new jobs were added in the month but it represents a slowdown from the revised estimate that 256,000 jobs were added in November. The December job growth is slower than previous months in 2022 but is still above the average job growth of 164,000 per month in 2019. Ultimately, monthly job growth needs to slow to around 100,000 to restore stability in the labor market.

The unemployment rate dropped back to 3.5% in December, revisiting low levels seen earlier in 2022 and in the months immediately before the COVID pandemic began. This very low unemployment rate reflects the continued tightness in the labor market, as many employers struggle to find the workers they need. Meanwhile, some interest-rate sensitive sectors are already experiencing weakness and laying off workers. Several firms in the tech and real-estate sectors have announced large layoffs over the past several months as financial conditions tighten. However, at least for now, the broad labor market is quickly reabsorbing workers impacted by job cuts.

The labor force participation rate measures how many people in the economy are working or looking for a job and it is a good measure of labor activity and absorption. In a positive sign, the participation rate moved up to 62.3% in December, from a revised 62.2% in November. This means that the strong labor market is enticing people to come off the sidelines and back into the job market. While it is good to see the labor force participation rate moving up, this has been one of the weak spots in the jobs report over the past year and there’s still a large gap between the current participation rate and where it was before COVID began. The pandemic-induced “Great Resignation” resulted in millions of early retirees and has caused continued labor market struggles.

The most positive indicator in the December jobs report is the surprising drop in wage inflation. On a year-over-year basis, wage growth dropped to 4.6% in December, down from a revised growth rate of 4.8% in November. Monthly wage growth also slowed in December to 0.3% compared to a revised growth rate of 0.4% the previous month. The Federal Reserve has been very concerned that the tight labor market is driving wage inflation higher, which then could push overall inflation higher. The softening in wage inflation is a good sign that Fed policy moves are having an impact on wage pressure.

The Consumer Price Index (CPI) dropped to a year-over-year change of 7.1% and a month-over-month change of 0.1% in November. These figures are lower than the previous month’s year-over-year and month-over-month changes of 7.8% and 0.4%, respectively. While this decrease is welcomed news, inflation still remains well above the Federal Reserve’s annual target rate of 2.0%. Core inflation, which excludes more volatile food and energy, showed signs of slowing in November, recording a year-over-year increase of 6.0% and month-over-month increase of 0.2%. These figures are both lower than the corresponding October figures of 6.3% and 0.3%. While much of the inflationary pressure over the last year could be explained by supply chain disruptions, continued inflation in the service sector tells a different story. Prices in services are driven almost entirely by wages, and during November the service sector inflation remained at 7.2%. This is the same figure as the month before, which adds support that inflation is slowing.

Growth by Industry

All industries, except two, had positive job growth in December. The private-sector added 220,000 jobs, with the goods-producing industries adding 40,000 jobs and the service-providing industries adding 180,000 jobs.

During December, industries leading the gains in nonfarm payroll employees were in education and health services (+78,000) and leisure and hospitality (+68,000). The only two industries with negative growth were professional and business services (-6,000) and information (-5,000).

Other notable job gains occurred in construction (+28,000) and trade, transportation, and utilities (+27,000). Additionally, nonfarm payroll employees in government increased by 3,000 during December. 

The Bottom Line

It’s important to not give any single economic report too much weight. However, the December jobs report is a good sign that the policy changes made by the Federal Reserve are having an impact on the labor market. While the drop in the unemployment rate is surprising, continued softening in overall job growth is consistent with a slowing job market. The increase in the labor force participation rate shows that more people are reengaging in employment. And the softening of wage growth is a good sign that wage pressure isn’t as strong as it was earlier in the year.

Price inflation is also softening but it remains far too high for comfort. The Fed’s goal is for inflation to slow back to 2% and it could take some time for that to happen. In the meantime, the Fed will continue its path of increasing the Federal Funds rate closer to 5% after which it will likely hold steady until clear signs of lower inflation occur. 

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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economics and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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