The latest jobs report shows that the U.S. labor market is still going strong, even as slowing wage growth bolsters hopes that the Federal Reserve can bring inflation under control without pushing the economy into a recession.
U.S. employers added 223,000 jobs in December as the labor market continued its impressive run of growth, the Bureau of Labor Statistics announced Friday, and the unemployment dropped a tenth of a point to 3.5%, matching a 50-year low.
At the same time, while robust by historical standards, job growth fell to a two-year low. Wage growth cooled, too, with average hourly earnings rising 4.6% in December, less than the 5% many analysts had expected to see and the smallest increase in more than a year.
The data may be just what the Fed wants to see as it attempts to reduce inflationary pressure while bringing a roaring economy in for a soft landing. “Employment report was about as close to a Goldilocks scenario as the Fed could have hoped for,” said Diane Swonk, chief economist at KPMG.
Treasuries rallied on Wall Street, sending interest rates lower, and stocks soared as investors embraced the hope that the Fed would ease up in its war on inflation in the coming months.
Randall Kroszner, a former Fed governor who teaches at the University of Chicago Booth School of Business, told Bloomberg that the report could push the Fed to raise rates by less than the 50 basis points most analysts are expecting. “It’s not that the Fed wants fewer jobs,” Kroszner said. “What they want is lower wage growth, more because they’re worried about persistent inflation.”
So, no recession? Some analysts say the data confirms that the U.S. economy is still very strong. “Unemployment is down a tick to 3.5%, near 50-year lows,” wrote economist Justin Wolfers. “Anyone who thinks this economy is in a recession is bananas.”
Julia Pollak, chief economist at ZipRecruiter, said in a note the report confirms that “the labor market was robust and resilient in 2022.” Even so, with the three-month moving average increase in wages, annualized, coming in at just 4% in December, the report eases concerns about a burgeoning wage-price spiral. “San Francisco Fed President Mary Daly has said that the Fed believes wage growth in the 3.5%-4% range would be consistent with its inflation target of 2%, so today’s report showing moderating wage growth should calm markets and assure the Fed,” Pollak said.
Still, most economists expect to see a recession at some point this year, even if it’s a shallow one, as the Fed maintains its effort to tighten monetary conditions. Joseph Brusuelas, chief economist at RSM, told The Wall Street Journal that he expects “the economy to slow noticeably by June, and in the second half of the year we’ll see a greater pace of slowing if not outright contraction.”
Brusuelas also said he wouldn’t be surprised if recent data led the Fed to soften its stance at least to some degree. “We’re closer to the peak in the Fed policy rate than we were prior to the report, and the Fed can strongly consider a further slowing in the pace of its hikes,” he said. “We could plausibly see a 25-basis-point hike versus a 50-basis-point hike at the Feb. 1 meeting.”
