he US labour market stayed strong in December, with nonfarm payrolls increasing by 223,000. This caps off a near-record year for job growth, following a 256,000 gain in November. The unemployment rate also decreased by 0.1 percentage points to 3.5%, matching a five-decade low, as participation increased.
Wages and Inflation
Average hourly earnings rose 0.3% from the previous month and 4.6% from December 2021. However, this follows November's previously high gain being revised lower. The slowdown in wage growth is likely welcome news for the Federal Reserve, as they see wage pressures, particularly in the service sector, as a key hurdle to achieving their 2% inflation goal.
Sectors Leading Job Gains
The job gains in December were led by health care and social assistance, leisure and hospitality, and construction. Several sectors saw little change in employment, including retail trade, manufacturing, transportation and warehousing.
Weakness in Certain Sectors
While overall job openings remain high and layoffs low, there are growing pockets of weakness in the labour market, particularly in sectors like technology and real estate. This week, Amazon announced plans to cut over 18,000 employees, the biggest number of layoffs in its history, and real estate brokerage Compass announced further layoffs. These developments, along with the concentrated nature of payroll gains and the fewest hours worked since the pandemic, temper some optimism around the employment data.
Federal Reserve's Response
The slowdown in wage growth may offer some comfort to the Federal Reserve that a key part of the inflation puzzle is losing steam. This may lead the Fed to pursue a less restrictive policy in the coming months, raising interest rates by 25 basis points rather than 50 basis points at their February and March meetings.
Outlook for 2023
Despite the tight labour market, job growth is expected to slow further in 2023, and the unemployment rate is forecast to rise to 4.6%, according to Fed forecasts. Many big tech firms have already announced significant layoffs due to rising interest rates, weak consumer demand, and a global economic slowdown.
The labour market is expected to remain tight, but the concentration of job gains in certain sectors and the slowing pace of wage growth suggest that some of the tightness in the market is starting to unwind. The Federal Reserve will be closely monitoring these developments.
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