Jobs Surge 216,000 Higher, Raising Inflation Risks

Employers in the United States accelerated hiring in December, adding 216,000 workers to their payrolls, the Department of Labor said Friday.

The unemployment rate was unchanged from 3.7 percent in the prior month.

Economists had expected the economy to add 170,000 after payrolls were reported as increasing by 199,0000 in November and 150.000 in October. The November figure was revised down to 173,000 and the October figure was revised down to 105,000. That totals to 71,000 fewer jobs.

In September, employers grew their payrolls by 262,000. In August, payrolls rose by 227,000.

The unemployment rate was expected to tick up to 3.8 percent.

In total, the economy added 2.3 million jobs in 2023, the lowest since the pandemic ended and Joe Biden became president. Compared with the pre-pandemic years, however, this is still a lot of job growth, much of it driven by sectors still rebuilding from mass layoffs due to lockdowns and the pandemic. The last time the economy added this many jobs in a year was 1999.

Strong Private Sector and Government Sector Growth, Wages Hotter Than Expected

Private payrolls grew by a strong 164,000, a big increase from 136,000 in November and just 44,000 in October. Government employment grew by 52,000, led by hiring in state and local government.

Average hourly wages increased 0.4 percent in December, a larger-than-expected increase. Compared with a year ago, average hourly wages are up 4.1 percent, a larger 12-month gain than the four percent recorded in the prior month. Economists had expected smaller wage gains of 0.3 percent for the month and 3.9 percent over the past 12 months.

The slowdown in hiring and wage gains had bolstered market expectations that the Fed is done raising rates and will begin cutting in the first half of next year. The Fed decided at its meetings in December, November, and September to hold rates steady to see how earlier rate increases are affecting the economy. The last time the Fed raised interest rates was in July.

Fed Cuts Delayed?

Prior to the release of the December jobs numbers, the market expected the Fed to cut rates at its March meeting and to cut four more times through the end of the year, for a total of five cuts. The Fed has eight meetings scheduled for this year, beginning with one at the end of January.

The market-implied odds of Fed cut in March had been as high as 90 percent last week. They fell from 75 percent to 65 percent this week. On Friday, they fell down to 57 percent in the immediate reaction to the jobs numbers.

The yield on 10-year Treasuries surged above four percent on Friday morning and stock futures fell.

The Federal Reserve has been trying to cool off demand for labor, fearing that higher wages could put upward pressure on inflation. In recent months, those efforts have appeared to pay off as job openings have fallen and payroll growth slowed.

The Fed has been closely watching wages, fearing that rising wages could reignite inflation. The higher-than-expected gains in the latest report suggest inflationary pressures may be building again. Most economists think that wage gains will have to fall to three percent or lower on a 12-month basis for the Fed to sustainably meet its two percent target.

Inflation has fallen sharply, although it remains significantly above the Fed’s two percent target. The latest figures from the Department of Commerce show the personal consumption price index rose 2.6 percent in the 12 months through November, with core prices rising 3.2 percent.

Initial jobless claims fell last week by 18,000 to 202,000, fewer than expected. Claims can be volatile around holidays. Continuing claims fell 31,000 to 1,855,000.

Payroll processor ADP, which produces an independent measure of private sector hiring, said Thursday that companies added 164,000 workers in December. The expectation was for 115,000 jobs. ADP said the private sector added 103,000 jobs in November.