U.S. job growth picked up in December and wages rose more than expected, somewhat undermining the prospects for the Fed to cut interest rates in March.
On Friday, January 5, the U.S. Bureau of Labor Statistics released data showing that the number of non-farm payrolls in the United States increased by 216,000 in December, which was not only much higher than the consensus estimate of 171,000, but also higher than almost all analysts' expectations, and higher than the revised 173,000 in November.
Similar to the previous month, the previous month's data was revised downward, with the change in new jobs in October revised down by 45,000 from 150,000 to 105,000, and the change in new jobs in November by 26,000 from 199,000 to 173,000. This means that 10 of the last 11 jobs reports have been revised downwards significantly.
By sector, job growth was mainly in areas such as healthcare, government, construction, leisure and hospitality. Indicators of the breadth of job growth are rising.
The U.S. unemployment rate was 3.7% in December, lower than expectations of 3.8%, the same as the previous November, and below 4% for 23 consecutive months. The strong unemployment rate was due to a decrease in the labor force, with the labor force participation rate falling further to 62.5% from 62.8% in the previous month, the largest monthly decline of 0.3 percentage points in the past three years, mainly among young and old people, and the participation rate of the 25-54 population fell by 0.1%.
In addition to the decline in the labor force participation rate, other signs of a cooling labor market in the report include that unemployed Americans are taking longer to find new jobs, the largest decline in full-time jobs since April 2020, and the decline in temporary employment to its lowest level since May 2021, which is often seen as a harbinger of a recession.
In terms of wages, wages rose more than expected in December, with average hourly earnings rising 0.4% month-on-month, beating expectations of 0.3% and in line with the previous reading. However, the year-on-year growth rate unexpectedly rose to 4.1%, beating market expectations of 3.9% and accelerating from 4% in the previous month.
The December data capped off a solid year for the U.S. labor market in 2023, and while the labor market slowed significantly, it did not fall into the downturn widely predicted at the beginning of last year. The labor market has been the main engine of the recovery in consumer spending. Inflation in the U.S. has slowed down at the same time, while consumer spending and healthy economic growth remain. Continued job growth and further cooling of inflation will strengthen the Fed's prospects for a soft landing for the economy.
Market reaction
According to the analysis, the non-farm payrolls data showed that U.S. job growth accelerated and wage growth exceeded expectations, which weakened the prospects for the Federal Reserve to cut interest rates in March. Following the release of the non-farm payrolls report, swap contracts linked to the Fed's meeting showed a slightly less than 50% chance of a 25 basis point rate cut in March, which was down from 60% earlier in the week. For the whole of 2024, swap contracts show that the policy rate is expected to be cut by about 128 basis points, down from about 145 basis points on Wednesday.
After the release of the non-farm payrolls data, the three major U.S. stock index futures extended their losses, with Nasdaq futures down 0.48%, S&P 500 futures down 0.42%, Dow futures down 0.41%, and the dollar index higher in the short term at 103.07.
U.S. Treasuries extended losses, with the U.S. 5-year Treasury yield rising 10 basis points on the day. U.S. 30-year and 10-year Treasury yields also rose in the short term, rising 6 basis points and 7 basis points respectively to 4.215% and 4.08% during the day.
However, after the U.S. stock market opened on Friday, the above market fluctuations have reversed to varying degrees, and then the U.S. ISM services data for December, which was significantly worse than expected, released at 10 o'clock EST Eastern time, further reversed the trend of major assets. Federal interest rate swaps repriced the probability of a 25 basis point rate cut by the Fed in March at 70%, Treasury yields turned lower during the day, and the dollar index fell.
Analyst commentary
Nick Timiraos, a well-known financial journalist known as the "new Fed news agency", said that the December non-farm payrolls report did not ask the Fed to change its policy stance. In fact, this doesn't make much difference for the Fed. The weekly gross wage index for private sector workers (including hiring, wages and hours worked) was little changed in December compared to November, with monthly wage growth firming but hours worked falling.
Some analysts said parts of the non-farm payrolls report indicated potential weakness, highlighted by the sharp decline in the labor force participation rate. However, the rise in average hourly earnings is likely to keep the Fed on hold longer than the market expects.
U.S. government officials commented
U.S. President Joe Biden said job growth was strong at a time when inflation was coming back down towards 2%. The price of gasoline, milk, toys, and air tickets fell. Workers' wages and wealth are higher than they were before the pandemic.
U.S. Treasury Secretary Janet Yellen said that pessimism about the U.S. economy proved to be unwarranted. Certain surveys are beginning to show that the American public is becoming more optimistic. The U.S. has achieved a soft landing, and hopefully that will continue. The economy means that the Fed has made a good decision.
White House economic adviser Brainard commented that the non-farm payrolls report shows that the economic situation is very healthy. Wage growth is at the heart of the pullback in inflation in 2023. Supply chain pressures have dropped to pre-pandemic levels.
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