The United States economy appeared to maintain a strong pace of job growth in December, with the unemployment rate dropping to 3.5%, but higher borrowing costs as the Federal Reserve combats inflation might see the labor market momentum slowing considerably by mid-year.
Nonfarm payrolls increased 223,000 in December, the Labor Department stated in its keenly watched employment report on January 6, 2023. Data from November was revised lower to show 256,000 jobs added instead of 263,000 as previously stated.
Economists polled recently by Reuters had projected that payrolls would increase by 200,000 jobs, with estimates ranging from 130,000 to 350,000. Monthly job growth appears to be well above the pace required to keep up with growth in the working-age population.
The unemployment rate plunged to 3.5% from 3.6% in November. In that context, the government revised the seasonally adjusted data for the household survey, from which the unemployment rate gets derived, for the past five years.
Average hourly earnings increased by 0.3% after 0.4% in November. This lowered the year-on-year increase in wages to 4.6% from 4.8% in November. Government data this week indicated that there were 10.458 million job openings at the end of November, translating to 1.74 jobs for every unemployed person.
The labor market has remained significantly strong, despite the Federal Reserve embarking last March on its quickest interest rate-hiking since the 1980s.
Interest-rate-sensitive sectors like finance and housing, and technology firms, like Amazon, Twitter, and Meta, the parent of Facebook, have cut jobs. Nonetheless, airlines, restaurants, hotels, and bars are now desperate for workers as the hospitality and leisure sector continues to recover from the COVID-19 pandemic.
Labor market resilience is now underpinning the economy by managing to sustain consumer spending. However, it increases the risk the Fed might lift its target interest rate above the 5.1% peak the US central bank projected in December and keep it there for some months.
The trend in employment growth, nonetheless, might slow considerably by mid-year as expensive credit weighs on consumer spending and eventually business investment.
The Fed raised its policy rate by 425 basis points in 2022 from near zero to a 4.25%-4.50% range, the highest level since late 2007. In December, it projected at least another 75 basis points of hikes in borrowing costs by the end of 2023.