December Jobs Report: Holiday Cheer

The latest jobs numbers are out from the U.S. Bureau of Labor Statistics. What do they mean for job seekers, employers and investors? Here’s a quick take from Glassdoor Chief Economist Aaron Terrazas.

The labor market’s year-long sugar high hit a wall amid December’s holiday revelry. After a December’s Arctic blast of high-profile tech layoffs wasn’t enough to cool the broader U.S. labor market. Today’s jobs report from the U.S. Bureau of Labor Statistics shows job gains slowing to the still-too-hot pace of 223,000 in December from downward-revised 256,000 in November. The unemployment rate unexpectedly fell to 3.5 percent, but the labor force participation ticked higher by a tenth of a percentage point,  still within the narrow range where it spent all of 2022. With 2022 now squarely in the rearview mirror, rarely has such good news been greeted with such fear about what it could mean for the economy moving forward. Economists, policymakers and business decision makers are left to puzzle over why the labor market has, for the most part, been so stubbornly unresponsive to policy efforts explicitly designed to cool it.

Payroll Employment Slows, but Remains Above Trend

Payroll employment grew by 223,000 in December, decelerating from 256,000 in November. The combination of normal monthly revisions and once-a-year updates to seasonality estimates reduced November’s originally-reported payroll gains by 7,000.  With retirements tracking above pre-pandemic rates and immigrant arrivals below their historic trend, the baseline rate of job creation necessary for a neutral labor market has very likely dipped below the pre-pandemic baseline estimate of about 200,000 payroll jobs per month – meaning that there is still a long way to go before recent labor market dynamics materially reverse.

Holiday-related sectors and industries facing longer-term structural hiring challenges led to job gains. Leisure & hospitality (+67,000) led job gains in November. Job gains were also high in health care (+55,000 jobs added) and construction (+28,000). In a perhaps ominous signal, though, the social assistance sector also saw strong job gains with payrolls increasing by 20,000, above the industry’s 2022 average monthly gains of 17,000. The Information sector (which includes media and some Internet companies) lost 5,000 jobs and the Professional & Business Services sector lost 6,000 jobs, with the biggest declines within that segment coming from Advertising businesses.

Unemployment Declines Unexpectedly

The unemployment rate fell unexpectedly in December to 3.5 percent, reversing small increases over the previous two months and returning to the cyclical lows last seen in September and July.

However, the labor force participation rate edged higher to 62.3 percent, within the narrow range where it spent all of 2022 and still about a percentage point below where it was before the COVID-19 pandemic. The longer-term decline in labor force participation has overwhelmingly been driven by older workers who saw their labor force participation drop sharply during the earliest months of the pandemic, and has never fully recovered – even as inflation eroded fixed incomes in 2022.

Wage Growth Slows, Giving Hope to Inflation Hawks

Average hourly earnings increased 4.6 percent year-over-year in December, a deceleration from 4.8 percent in November. Slowing wage growth provides a silver lining for industries concerned about rising interest rates, as slowing wage growth with a still-robust hiring market would be the best of both worlds outcome of rising interest rates.

Conclusion

In retrospect, 2022 will go down in history as the year when the jobs market managed to defy gravity despite so many high-profile headwinds. Neither high interest rates nor high inflation seemed to be sufficient to reverse the combination of pent-up consumer demand and longer-term labor supply challenges. The labor market is slowing, but not so unbearably sharply. The cyclical storm clouds of possible recession looming on the horizon are a little bit less daunting than they were yesterday, but the longer-term structural headwinds from demographics are no less fierce. When it comes to the labor market, we should perhaps be a little bit less scared about 2023 and a little bit more worried about the years that will follow it.

More Insights

Payroll growth slowed to 223,000 in December 2022, roughly in line with expectations. With the exception of July, jobs growth has been steadily and gradually declining through much of 2022.

Across 2022, there were 4.5 million jobs added, the second highest annual level since 1940 after 2021 when 6.7 million jobs were added. In large part, the job gains in 2021 and 2022 were about recovering from Covid. But as of mid-2022, we're now exceeding pre-pandemic job levels.

Health care & social assistance (+74,400) and leisure & hospitality (+67,000) continue to lead job gains, like much of 2022. Professional & business services was down in large part due to temporary help services falling, potentially signaling early cost-cutting by employers. Construction was surprisingly up 28,000 despite the slowdown in housing. And while the information sector did lose 5,000 jobs, this was largely due to the motion picture & sound recording subsector, rather than the tech subsectors which continued adding jobs in December.

Average hourly earnings growth decelerated to 4.6 percent year-over-year in December and notably, November's hot print was revised down from 5.1 percent to 4.8 percent. An encouraging sign for a Federal Reserve worried about wage-driven inflation.

The unemployment rate is back down to 3.5 percent. The unemployment rate has only been that low in the last year, at the end of the pre-pandemic expansion in 2019-2020, and then not since 1969.

And the unemployment rate decrease was married with a rise in labor force participation both overall and for prime-age workers (25-54) after a few months of trending downwards.