• January 8, 2024

Job market resilience may delay interest rate cuts.

January 5, 2024 | Roy Maurer

Hiring was better than expected as 2023 came to a close, with employers adding 216,000 new positions in December, while the unemployment rate held at 3.7 percent, near historic lows, according to the latest jobs report from the U.S. Bureau of Labor Statistics.

Economists’ expectations for job gains in December had been around 170,000. Hiring was revised down for the rest of the fourth quarter of 2023, with payrolls in November falling from 199,000 to 173,000 and in October from 150,000 to 105,000.

“Factoring in downward revisions to the prior months’ figures, the 3-month average employment gain was 165,000, right in line with the 2019 average, suggesting that the labor market has come back to pre-pandemic normal,” said Julia Pollak, chief economist at ZipRecruiter.

Total payroll gains for the year topped 2.7 million, or a monthly average of 225,000, down from 4.8 million, or 399,000 a month, in 2022, but higher than in the years before the pandemic.

“Beating analyst expectations, the labor market in December remained healthy to end out 2023,” said Amy Glaser, senior vice president at Adecco. “With the unemployment rate remaining steady, and the JOLTS report released earlier in the week that indicated a ratio of 1.4 available job openings to available workers, we see the labor market as we enter 2024 to remain a candidate and employee-driven market.”

Becky Frankiewicz, president and chief commercial officer for ManpowerGroup, said that the employment report “shows continued stabilization and an optimistic start to the New Year for employers and workers. The 2024 labor market is all about balance and moderation, restoring equilibrium after four years of pandemic-related swings. Employers are holding onto their people and hiring where the demand exists.”

Pollak characterized 2023 as mixed overall. “2023 was a remarkable year for the job market in that the economy dodged a widely anticipated recession, despite the interest rate increases in 2022 and 2023,” she said. “Not only that, but it was the 5th-best year on record in terms of the average unemployment rate—and the year black unemployment hit a record low, and youth unemployment hit the lowest rate since the 1950s. It was also a solid year for labor force growth.”

But job gains were mediocre, she said. “Employment grew only 1.7 percent over the year, which puts it in the bottom half of all years since 1948. And job growth narrowed sharply, becoming very concentrated in just a few sectors.”

The better-than-expected employment report may allay fears of a recession lurking around the corner but could also dim expectations for interest rate cuts.

“The jobs market won’t stop dashing financial market hopes for data supporting the case for lower interest rates,” said Glassdoor Chief Economist Aaron Terrazas. “Today’s hot hiring data will likely cool expectations of a Federal Reserve pivot on lending conditions.”

Terrazas said that if the labor market continues to remain this robust, conditions could lead to a second surge in inflation and a delay in lower interest rates in 2024.

“All in all, 2023’s final round of jobs data lived up to a year when the labor market simply refused to slow,” he said.

“If you’re looking for signs of a recession, they’re just not there,” said Lightcast Senior Economist Ron Hetrick. “For investors and homebuyers who are waiting for interest rates to come down, this is signaling that the labor market is still running too hot. But for the average person who’s looking for a job, this shows there are still a lot of opportunities out there,” he said.

Lightcast Senior Economist Elizabeth Crofoot added that the job gains are a sign that employers are still fighting for workers in a tight labor market. “Some have been hoping for interest rate cuts as early as March, but I don’t think that’s in the cards,” she said.

Industry Breakdown

Job gains in the government, leisure and hospitality, and health care sectors accounted for the bulk of job creation in December and throughout 2023.

Health care hiring continues to be boosted by the aging of the U.S. population, while employers in the public sector and in accommodation and food services continue to play catch-up from pandemic-driven disruptions.

“Our real-time data shows growth being driven by click and brick retail and affordable hospitality during the busy holiday season as consumers shop and enjoy experiences to suit their budget,” Frankiewicz said. “Companies like Walmart, Kroger, Hilton, Walgreens and CVS are holding strong as the largest employers. Jobs in health care and services and AI and machine learning positions remain in high demand.”

Terrazas said that hiring was strongest in “business cycle agnostic sectors” like government (+52,000, primarily in local government), leisure and hospitality (+40,000) and health care (+38,000).

Andrew Flowers, lead labor economist at Appcast, said that while health care and government continue to be the main powerhouses of the labor market, other sectors are also holding up comfortably.

“Construction, for example, was set to struggle from rising interest rates, but has instead made solid gains in recent months,” he said. Construction and retail each added 17,000 jobs, while employment in the transportation sector declined (-23,000), particularly in the package delivery subsector (-32,000) which historically sees a seasonal bump in December.

“Although pandemic-related supply chain issues have mostly resolved, these transportation and warehousing declines could be due to ongoing global supply chain disruptions influenced by geopolitical conflicts and climate issues, which could threaten the flow of grain, oil, and consumer goods,” said Sania Khan, chief economist at Eightfold AI. “We’re likely to see challenges to ocean carriers, truckers, other freight, and logistics companies that will have to divert resources.”

Manufacturers added just 6,000 jobs in December. “Despite a perceived cooling, we are still experiencing a candidate-driven tight labor market,” said Joanie Bily, chief workforce analyst at Employbridge, an industrial staffing firm in based in Atlanta. “One primary concern is that most jobs have been added in the same industries, indicating that the private sector isn’t driving hires and growth is concentrated. We will continue to monitor manufacturing hiring with the anticipation of seeing a boost after experiencing many months of little movement in this vital economic sector.”

The staffing industry had a particularly hard year, with temporary help employment falling from 3 million in December 2022 to 2.8 million last month. “Staffing agencies are feeling the cooling effects of the labor market in real-time,” said Richard Wahlquist, chief executive officer of the American Staffing Association. “The number of new jobs in temporary help services has dropped by nearly 2 percent since October, and members are reporting that employers across most sectors continued to be cautious about expanding permanent and flexible hiring in December.”

Temporary staffing levels haven’t been this low since 2014, Hetrick said. “Right now, workers are still so scarce that employers are more likely to hire people full-time and hang onto them than use temp workers. At the same time, the kind of investment money that spurs major expansions isn’t there because of high interest rates. This is a situation the industry has never faced before.”

Unemployment Holds, Labor Force Participation Sinks

The unemployment rate ranged from 3.4 percent to 3.8 percent during 2023. “It is up from 3.4 percent to 3.7 percent at the end of 2022 and the start of 2024 but has been roughly flat over the past two quarters,” Terrazas said. “Unless we start to see the unemployment rate begin to move definitely higher over the spring, it will begin to flatline from a year earlier by the early summer.”

Many economists predict that the unemployment rate will rise above 4 percent this year. A more encompassing unemployment measure that includes discouraged workers and those holding part-time jobs for economic reasons edged higher to 7.1 percent.

After moving steadily higher for much of the past three years, the prime-age labor force participation rate has begun to stall, and it declined by 0.3 percentage points to 62.5 percent in December, its lowest since February and the biggest monthly drop in three years.

“The rise in labor force participation from the previous year may be reversing,” Khan said. “The prime working-age employment-population ratio fell to 80.4 percent, the lowest since January.”

Crofoot said that the fewer people there are in the labor force, the more upward pressure there will be on wages. “And as the population ages, it’s going to be harder and harder to find workers.”

Wages Pick Up

Average hourly earnings rose 0.4 percent on the month and were up 4.1 percent from a year ago, both higher than estimates.

“This could potentially influence the Federal Reserve’s decision to keep interest rates elevated, as they are being closely watched as a measure to counterbalance inflation without causing a sharp downturn,” Khan said.

Pollak noted that year-over-year wage growth slowed from 4.8 percent in December 2022 to 4.1 percent last month. “But inflation slowed more—from 6.4 percent to 3.1 percent—and so real wage growth flipped positive, sustaining expectation-beating consumer spending, and setting the economy up for continued resilience in 2024.”

Terrazas added that despite a general trend of slowing wages, wage growth will likely pick up during the first months of 2024 as new minimum wage laws and new union contracts negotiated over the fall take effect.

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