Jan 5, 2024 - Economy

Unpacking the December jobs report's mixed signals

Animated illustration of a trend line teetering back and forth as it balances on a briefcase

Illustration: Annelise Capossela/Axios

The labor market had plenty of momentum heading into 2024. For American workers, that's welcome news. For central bankers, it might make things a bit more complicated.

Why it matters: For months, the job market pleased both worlds. Hiring had cooled, but jobs remained plentiful; meanwhile, wage gains had slowed, but slower inflation meant pay was picking up in real terms.

  • Friday's jobs report showed lingering heat in wages, alongside some disappointing news on the supply of labor.

What's new: The economy added 216,000 jobs in December as hiring picked up from a more muted pace in the fall.

  • That overshot the roughly 170,000 payroll gain economists expected, but downward revisions in the prior two months (by a combined 71,000 jobs) more than made up the difference.

Probably the best piece of good news for workers was strong pay growth. Average hourly earnings rose 0.4% in December, continuing a steady upward trend in the final quarter of 2023.

  • Over the last 12 months, average hourly earnings are up 4.1% — meaning wages are rising faster than prices, a turnaround from earlier in the inflation shock that pinched consumers.

The other side: That sunny news for average Americans might trouble Fed officials, who worry swiftly rising pay is a sign the labor market remains out of whack.

  • Over the past three months, wages have increased at a 4.3% annualized rate — the quickest pace since the June-July-August period.
  • At his last news conference, Fed chair Jerome Powell said that "if wages are running around 4 percent, that's still a bit above" the level consistent with 2% inflation. And that's exactly what the December numbers showed.

What they're saying: "Job creation remains solid, but persistently strong wage growth adds a wrinkle for policymakers that could push back against a near-term reversal in rate policy," Jim Baird, CIO of Plante Moran Financial Advisors, wrote in a note.

  • "For the time being, it appears that the Fed will be content with a 'steady as she goes' mindset."

Supply-side improvements — including more workers entering the workforce — have been a key reason inflation has come down amid job market strength. But those improvements partly reversed in December.

By the numbers: The unemployment rate held at 3.7%, which is low by historical standards and the 23rd consecutive month under 4%.

  • But that masked a steep shrinkage in the labor force, which fell by 676,000 people, undoing prior months' gains.
  • The labor force participation rate — the share of adults working or looking for work — fell by 0.3 percentage points, to 62.5%.
  • The employment-to-population ratio also fell three ticks, to 60.1% — the same as its level a year earlier.

Between the lines: The reversal of what had been a positive trend on labor supply will also tend to make the Fed wary of continued labor market tightness. If there are fewer workers coming off the sidelines than it appeared, it implies a potentially overheated economy.

Of note: The jobs report is comprised of two surveys — one of businesses that produces the headline payrolls figure, and another of households that is used to calculate the jobless rate and labor force data.

  • The household survey has a higher statistical error and is more volatile month-to-month, so economists tend not to focus too much on any month's numbers.

Yes, but: In the December numbers, at least, the household survey paints a much weaker picture of the labor market.

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