Job growth was much stronger than expected in December, likely giving the Federal Reserve less incentive to cut interest rates this year.
Nonfarm payrolls rose by 256,000 this month, up from 212,000 in November and above the Dow Jones Consensus forecast of 155,000, the Bureau of Labor Statistics reported Friday.
The unemployment rate fell slightly to 4.1%, a tenth of a point below expectations. An alternative measure that includes discouraged workers and those holding part-time jobs for economic reasons fell to 7.5%, down 0.2 percentage points and the lowest level since June 2024.
Stocks slumped after the report, while Treasury yields jumped as traders priced in a reduced likelihood of Fed rate cuts this year.
“This is a hot report,” said Dan North, senior North America economist at Allianz Trade. “You have to think that [Fed Chair] Jerome Powell breathes a sigh of relief because his job just got a little easier. Inflation hasn't changed in months, so there's no incentive to cut rates. Now you understand that [jobs report] So you don’t have to cut interest rates to stimulate the economy.”
The report caps a year in which employment increased every month, albeit unevenly and at times raising questions about whether a recession was looming. However, the last two months showed that the labor market was still in good shape as the Fed considers its next steps in monetary policy.
One area that Fed officials have stressed is not a source of inflation is the labor market, and wages rose slightly less than expected.
Average hourly wages rose 0.3% month-on-month, in line with forecasts, but the 12-month increase of 3.9% was slightly below forecasts and suggests that wage inflation is at least becoming less of a concern. The average weekly working time remained constant at 34.3 hours.
“You'll never hear me complain that we have 250,000 jobs,” Chicago Fed President Austan Goolsbee said on CNBC's “Squawk on the Street.” “I think it's a strong jobs report. I am even more convinced that the labor market will stabilize at around the full employment rate.”
Job growth came from the familiar sources of healthcare (up 46,000), leisure and hospitality (43,000) and government (33,000).
Retail also saw a significant increase of 43,000, after losing 29,000 in November before the start of the holiday shopping season. The sector recorded full-year job growth of 2.2 million, a significant decline from the 3 million gain in 2023.
The revisions for previous months were less extensive than the recent trend. The October count saw the number increase by 7,000 to 43,000, while the November figure was reduced by 15,000 compared to the previous estimate.
At their December meeting, Fed officials assessed the labor market as mostly healthy, although it was slowing. The Fed voted at the meeting to cut its key interest rate by a quarter of a percentage point, but indicated that rate cuts would be slower going forward.
Markets expect the Fed will not ease at the meeting later this month, with futures prices swinging after the release of the jobs report on expectations of just one cut this year. According to CME Group's FedWatch Indicator, the market's implied probability of a single cut rose to 68.5% following the jobs report.
Goolsbee said he still expects rate cuts this year as long as the data flow remains consistent.
“The surprisingly strong jobs report certainly won't make the Fed any less hawkish,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “All eyes will now turn to next week’s inflation data, but even a negative surprise in these numbers likely won’t be enough to prompt the Fed to cut rates any time soon.”
Central bankers have recently expressed concern about the pace of inflation, which has been above the Fed's 2 percent target, largely due to stubbornly high housing costs and some goods prices.
The budget report, which the BLS uses to calculate the unemployment rate, showed an even better labor market picture. This number increased by 478,000 month-on-month as the labor force grew by 243,000 and the proportion of working-age people who either had a job or were looking for employment remained constant at 62.5%.
The number of full-time employees increased by 87,000, while the number of part-time employees increased by 247,000. The number of unemployed fell by 235,000.
Duration of unemployment rose slightly to 23.7 weeks, the highest level since April 2022. However, the number of people unemployed for 27 weeks or longer fell to 1.55 million, a decrease of 103,000.
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