The US just capped off another banner year of job growth. Now it’s at a turning point

By Alicia Wallace, CNN

New York (CNN) — Friday’s jobs report marked a fitting end to what was an odds-defying year.

The US economy added 216,000 jobs in December and the unemployment rate held steady at 3.7%, the Bureau of Labor Statistics reported Friday. The monthly total blew past expectations for a net gain of 160,000 jobs and capped off what’s been a year of resilience in the labor market.

Around this time last year, many experts said it was a sure bet that the Federal Reserve’s inflation-fighting rate-hiking campaign would result in job losses mounting and send the economy into a recession.

Instead, the labor market’s continued strength helped fuel consumer spending and economic growth during the past 12 months. The job market has indeed cooled down but did not derail despite 11 Fed hikes that brought the benchmark interest rate 5 percentage points higher in under two years’ time.

“We’ve lived through something quite unprecedented, which is such a large increase in interest rates and such a sharp drop in inflation without a meaningful increase in unemployment,” Julia Pollak, senior economist at ZipRecruiter, told CNN in an interview. “It’s never happened before.”

The Fed appears to be nailing the so-called “soft landing” of bringing inflation down without flinging the economy into a recession.

But the plane hasn’t landed just yet.

Friday’s jobs report also showed that the labor market and the broader economy remain at a turning point, with the ultimate destination likely hinging on interest rates coming down from 22-year highs, she said.

“We are seeing the labor market slow pretty substantially,” Pollak said, noting October and November were revised down by a combined 71,000 jobs. “The underlying rate of job growth is around 150,000/140,000, and that will continue to gradually slow in the coming months until the Fed takes its foot off the brake pedal.”

Fed Chair Jerome Powell has long cautioned that the labor market needs to cool from its breakneck pace and have a better alignment in the number of jobs available and the number of people hoping to take them. Last month, he acknowledged that the US jobs market had come into “better balance.”

Powell’s comments, and a batch of positive inflation data, helped fuel optimism from the markets that the Fed could start cutting rates sooner than later.

Friday’s robust jobs total and stronger-than-expected wage gains — 0.4% monthly and 4.1% annually — likely pushes that back, Andrew Patterson, Vanguard’s senior international economist, wrote Friday.

“Today’s report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation,” Patterson said, noting the central bank’s inflation target. “Strong headline job growth and wage growth above 4% combined with Fed communications, including the minutes, emphasizing the need to remain higher for longer decrease the likelihood of preemptive rate cuts.”

He added: “The decision of when to first cut policy rates remains one for the second half of the year, in our view.”

‘An extraordinary year’ for labor

Through 2023, the United States recorded a net gain of nearly 2.7 million jobs, according to seasonally adjusted data from the BLS. That averages out to a net gain of 225,000 per month.

That’s almost half of the 4.79 million jobs gained in 2022, which was the second-highest annual total on records going back to 1939. It’s also significantly under 2021’s record-setting year, when 7.27 million jobs were added as the nation continued to recover from the massive losses seen during Covid.

However, the 2.7 million jobs yearly total is more in line with what was seen during the economic expansion that occurred in the decade before the pandemic.

“The December [jobs report] resulted in a net increase of 216,000 in job creation, bringing to a close an extraordinary year in job creation,” Joe Brusuelas, RSM US principal and chief economist, wrote in a note issued Friday. “During the past year unemployment averaged 3.6% and closed the year at 3.7% in what the best year for labor since the 1950s.”

In January of last year, the unemployment rate fell to 3.4%, hitting a level not seen since May 1969, two months before Neil Armstrong stepped on the moon.

In April 2023, the unemployment rate for Black workers hit a record low of 4.7%.
And then in June, the labor force participation rate for women in their prime working age (25-54 years old) hit an all-time high of 77.8%.

Some warning signs

Last month’s gains were fueled by continued strong hiring in government (up 52,000 jobs), health care (+37,700), social assistance (+21,200 jobs), construction (+17,000 jobs) and leisure and hospitality (+12,000 jobs).

Those drivers of growth also serve as causes for concern.

During the past six months, 92% of all job gains were concentrated in three sectors: health care, government and leisure and hospitality, Pollak said. Spread across the whole year, that share was 76%, she added.

“Typically, job growth is more broad-based,” she said. “And so outside of those sectors, it’s looking pretty anemic in 2023.”

Labor turnover data released Wednesday showed a steep drop in hiring and quits, the latter providing a measurement of opportunity in the economy.

“Those are warning signs that perhaps we could be at risk of some overcooling in the coming months,” she said.

What could help counterbalance that is wage growth, she noted.

During the course of 2023, average hourly earnings slowed from a 4.8% annual growth rate in December 2022 to 4.1% last month, BLS data shows. As of November, annual inflation (as measured by the Consumer Price Index) has cooled to 3.1% from 6.5% in December 2022, according to the BLS.

“In May [2023], real wage growth flipped positive, and that has been a good news story for workers who are really hurting after 25 straight months of negative real wage growth,” she said. “It’s good news for the economy going forward; it does somewhat reduce the risk of a recession early in the year, and it props up consumer spending, demand and revenues for businesses.”

Plus, she added, “productivity has been so high, it’s not necessarily inflationary.”

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