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PNC Chief Economist Gus Faucher: Another Strong Employment Report for December, But Big Downward Revisions to Previous Months; Labor Force Contracts

This article is written by PNC Chief Economist Gus Faucher.

PNC Chief Economist Gus Faucher (Courtesy of PNC Bank)

This article is written by PNC Chief Economist Gus Faucher.

  • Employment increased by 216,000 in December according to a survey of businesses, well above consensus, but the details were not as strong. There were big downward revisions to job growth in October and November.
  • Private-sector job growth is slowing faster than overall job growth.
  • The unemployment rate held steady at 3.7% and remains historically low.
  • The labor force participation rate fell in December, a concern if sustained into 2024.
  • Average hourly earnings increased at the fastest monthly pace since the summer, and wage growth is still too strong to be consistent with the Fed’s inflation objective.
  • The labor market will remain solid in 2024.
  • PNC expects fed funds rate cuts in the second half of 2024.

The jobs report for December 2023 came in stronger than expected. Employment as measured in a survey of firms rose by 216,000 over the month, above the consensus expectation of around 170,000. However, there were large downward revisions to job growth in October (to 105,000 from 150,000) and November (to 173,000 from 199,000), for a combined downward revision of 71,000. Over the last three months job growth has averaged 164,000, close to the economy’s long-run potential. The UAW strike weighed on job growth in October, with a rebound in November after the strike settled.

The private sector added 164,000 jobs in December, with government employment up by 52,000. Over the past three months private-sector job growth has averaged only 115,000 per month, less than one-half of the pace of the first three months of 2023.

For all of 2023 the U.S. economy added an average of 225,000 jobs per month, down from an average of 399,000 in 2022.

The unemployment rate held steady at 3.7% in December, with both employment and the labor force contracting. The unemployment rate has been below 4% for almost two years, the longest such stretch since the late 1960s. Employment in a survey of households (different from the survey of employers) fell by 683,000 in December, after an increase of 586,000 in November; employment is much more volatile in the household survey. There were average job losses in the household survey of 122,000 in the three months through December.

The number of people in the labor force—either working or looking for work in the household survey—fell by 676,000 in December. The labor force participation rate—the share of adults in the labor force—fell to 62.5% in December from 62.8% in November. This is the lowest the labor force participation rate has been since February. If sustained, the drop in the labor force participation rate could lead to a further tightening in the job market.

Goods-producing industries added 22,000 jobs in December, with small increases in construction and manufacturing employment. Private service-providing industries added 142,000 jobs over the months. Education and health services added 74,000 jobs. Employment in professional/business services rose by 13,000 in December, but that included a drop of 33,000 in temporary help, which often leads the overall labor market. Employment rose by 17,000 in retail trade, but fell by 23,000 in transportation and warehousing.

Average hourly earnings rose 0.4% over the month (0.44% before rounding), the biggest increase since June. On a year-over-year basis growth accelerated to 4.1% in December from 4.0% in November. This is a concern for the Federal Reserve; average hourly earnings growth needs to be closer to 3.5% to be consistent with the central bank’s 2% inflation objective. Still, this is a significant slowing from wage growth of almost 6% in early 2022.

The average workweek fell somewhat from 34.4 hours to 34.3 hours. With more workers, higher wages, and a shorter workweek, labor market earnings were up 0.3%, after a 0.7% increase in November (boosted by the end of the UAW strike). With inflation slowing, real household incomes are increasing.

Although the headline jobs number of 216,000 came in stronger than expected, the details of the December jobs report were softer. There were big downward revisions to job growth in October and November, and much of the increase in employment came from the government. However, wage growth picked up, which is an issue for a Federal Reserve still concerned about inflation that remains above its 2% objective. Another concern is the contraction in the labor force in December. Although it could bounce back in 2024, a shrinking labor force would put upward pressure on wages and inflation.

The labor market had a strong 2023, although the pace of improvement slowed over the course of the year. Job growth is now near its sustainable rate of around 150,000 per month, which would allow for continued job and income gains but slower inflation. Job growth should continue in 2024, with the unemployment rate perhaps increasing a bit, creating somewhat more slack in the labor market.

This is the kind of jobs report the Federal Open Market Committee wants to see, with slowing but still-solid job growth. There is nothing in this report to indicate that inflation is set to reaccelerate. But with wage growth still running a bit hotter than the Fed would like, the FOMC is not ready to cut the fed funds rate anytime soon. PNC has the FOMC cutting the fed funds rate by 75 basis points in the second half of 2024.