December Jobs Report: Payroll Topper Should Temper Rate Expectations

Equity markets were on edge heading into the final monthly payroll detail of 2023. On Thursday, the Nasdaq Composite (NDX) closed lower for the fifth consecutive day, its worst streak since October 2022. Unfortunately, today’s release may not have had the desired effect of quelling some of the new year jitters.

The Labor Department’s monthly report showed that employers added 216,000 jobs in December, well above expectations of a 170,000 gain. The unemployment rate, on the other hand, held flat at 3.7%. In addition, the reported figures from the past two months were revised down by a combined 71,000 jobs.

Immediately following the release, all three indexes continued their turn lower in the pre-market trading hours. The Dow Jones Industrial Average Index (DJI) and the Nasdaq 100-Index were down over 50 points in the morning hours, while the broader S&P (SPY) traded flat. The turn lower came as longer term Treasury’s ticked higher to around 4.05%.

The hotter-than-expected reading likely tempered optimism surrounding potential rate cuts from the Federal Reserve later this year. Here’s what else market observers can absorb from the December jobs report.

What Sectors Are Adding The Most Jobs?

Those looking for a new job could likely land a position in healthcare or government. The two sectors combined added 90,000 positions in December, accounting for approximately 42% of the total December jobs gains. The additions build upon last month’s strong pace of hiring. And looking ahead, healthcare could remain particularly robust given an aging population and the continued shortages in key subsectors.

While healthcare and the government sectors still commanded a sizable share of the total additions for the month, the monthly gains in December were broader in scope.

The leisure and hospitality sector added 40,000 jobs, slightly above its average of 39,000 over the last 12 months, though significantly less than the pace of growth in 2022, where the sector added 88,000 jobs per month.

While employment in the industry remains below its pre-pandemic level, the continued concentration of jobs added in the sector is indicative of the ongoing recovery from the impact of the pandemic.

Elsewhere, social assistance rose by 21,000 as did professional and business services, which grew 13,000. Though construction employment continued to trend up during the month, losses were seen in other macro-based sectors such as transportation and manufacturing. The sector lost 23,000 jobs following an uplift last month upon the return of 30K workers who had previously been on strike.

Other key sectors that saw jobs decline in December included retail, which reported 13,000 job losses among department stores. The losses, however, were offset elsewhere, leading to an overall net gain in retail trade of 17,000.

December Wage Growth And Outlook

Heading into the print, forecasters were expecting average hourly earnings to grow 3.9% over the last 12 months. In December, growth came in hotter-than-expected, at 4.1%. This may likely reinforce the viewpoints of more hawkish Fed policymakers, who believe the labor market is still too tight to be loosening policy.

Wage growth, however, may slow in the periods ahead. One potential reason is that overall demand for labor is cooling. In 2023, for example, total job postings were still up over 25% from pre-pandemic levels but were down 15% from the prior year. While this indicates the pandemic-based recovery is continuing, it’s occurring at a more moderate pace.

In addition, employees have become more reluctant to quit their jobs in recent months. This is likely due to the clear signs of cooling exhibited in the overall labor market as well as to broader macroeconomic uncertainties. It also could indicate increased satisfaction with their current roles. At any rate, the declining quit rate is significant since a change in job is often where an employee can get the most bang for their buck in terms of a salary increase.

The less dynamic labor market could ultimately slow the pace of wage growth and bring the data more in-line with the Fed’s 2% inflation target.

How May The December Jobs Report Impact Fed Policy?

A seeming consensus among market observers is that the Fed is done raising interest rates. And many are now forecasting cuts throughout the calendar year beginning in March. The CME FedWatch tool currently shows an over 50% chance of a 25-basis point cut in March. This would bring the target range to 5.25% to 5.50%.

Today’s job report likely dampens the rate cutting viewpoint. And while the likelihood of at least one or more rate cuts this year is high, investors would be remiss to overlook more hawkish commentary among some pockets. Richmond Fed President Tom Barkin, for example, recently threw cold water on the notion that rate hikes are done, saying, “the potential for additional rate hikes remains on the table,” citing the tight labor market as one data point supporting his viewpoint.

In my view, today’s job report serves as a caution in getting overly excited. Nevertheless, it doesn’t necessarily take away from the likelihood of a continued rate pause in the months ahead.

Main Takeaway From December Jobs Report

Including December’s gains, the U.S. added 2.7 million jobs in 2023, well below 2022’s 4.8 million. And despite the hotter-than-expected reading in December, growth has still slowed markedly in the back half of the year. Policy makers and investors alike could reasonably attribute the slowing to a combination of the effects of a sustained environment of higher interest rates and the generally uncertain global macroeconomic outlook.

For those expecting looser policy in the periods ahead, today’s report could support the notion that the U.S. economy is headed for a soft landing. But the strong monthly gains should temper overly optimistic calls for looser monetary policy.

It’s also important to note that the total job gains in 2023 were still approximately 40% above the total additions in 2019. And excluding the pandemic era, the gains in 2023 were the strongest year for growth since 2014. Conviction predictions for a Fed rate cut as early as March, therefore, could perhaps be premature.

In my view, it may take several more months of sustained job growth in the range of 125,000 to 195,000 with continued wage growth moderation to clearly warrant a loosening in monetary policy. While I expect this to occur, I see interest rates holding steady in their current range until at least the midpoint of the calendar year.

While the labor market may have ended 2023 on a warmer than desired note, moderation through 2024 will likely be a prevailing theme, in my view. This may not immediately translate to a lower rate environment, but it doesn’t necessarily rule it out either.