Non-farm payrolls rose 223okay in December because the sturdy job market beat expectations

Job growth slowed in December but was still better than expected, a sign that the job market remains strong even as the Federal Reserve tries to rein in economic growth.

Nonfarm payrolls rose by 223,000 this month, beating the Dow Jones estimate of 200,000, while the unemployment rate fell to 3.5%, 0.2 percentage point below expectation. Job growth marked a small decline from November’s gain of 256k, which has been revised down by 7k from the original estimate.

Wage growth was weaker than expected, suggesting that inflationary pressures may be easing. Average hourly earnings rose 0.3% this month and 4.6% year-on-year. The respective estimates assumed growth of 0.4% and 5%.

By sector, leisure and hospitality led with 67,000 additional jobs, followed by healthcare (55,000), construction (28,000) and social assistance (20,000).

Stock market futures rallied post-release as investors look for signs that the jobs picture is cooling and inflation is also falling.

“From a market perspective, they’re mostly reacting to weaker average hourly earnings,” said Drew Matus, chief market strategist at MetLife Investment Management. “People are turning that into a one trick pony, and that one trick is whether that’s inflationary or not. The unemployment rate doesn’t matter much if average hourly wages continue to fall.”

The relative strength of job growth comes despite repeated efforts by the Fed to slow the economy, particularly the job market. The central bank raised interest rates seven times in 2022, totaling 4.25 percentage points, with further increases likely.

First and foremost, the Fed is trying to close a gap between demand and supply. In November there were about 1.7 job openings for every available worker, an imbalance that has remained stable despite the Fed’s rate hikes. Strong demand has pushed up wages, although they have mostly not kept pace with inflation.

However, December wages data may encourage the Fed’s efforts to impact demand.

“There are some signs that things are moving in the right direction. We’re seeing the impact of the blunt tools of monetary policy taking hold,” said Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office. “I don’t think this will dissuade the Fed from some additional hikes in the future, but it’s undoubtedly encouraging to see wage moderation.”

The decline in the unemployment rate came as the labor force participation rate rose to 62.3%, still a full percentage point below where it was in February 2020, the month before the Covid-19 pandemic.

A broader measure of unemployment, which takes into account discouraged workers and those who have part-time jobs for economic reasons, also declined, falling to 6.5%, the lowest ever in a record dating back to 1994 tied for the lowest since 1969.

The household employment number, which is used to calculate the unemployment rate, showed a huge gain for the month, rising by 717k. Economists have been watching the household survey, which generally underperforms the number of facilities.

The US is heading towards 2023, with most economists expecting at least a mild recession as a result of Fed policy tightening aimed at curbing inflation, which is still near its highest level since the early 1980s lies. However, the economy ended 2022 on a strong note, with GDP growth at a rate of 3.8%, according to the Atlanta Fed.

Fed officials at their last meeting said they are encouraged by the latest inflation data but need to see more progress before they are confident inflation is slowing and they can ease rate hikes.

As of today, markets are largely expecting the Fed to hike rates another quarter of a point at its next meeting, which ends on February 1st.

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