The December US labour market report is a very mixed report and for that reason, it’s one of those reports that’s really difficult to describe. The overall headline payrolls data came in well below expectations, with only 50,000 net new jobs added. Further indicators point to sectors that are resisting and rebounding. The report revealed that November and October both had negative revisions. On net, the two-month revision means we lost 76,000 jobs. As literally thousands of analysts comb through these mixed signals, what it means for Federal Reserve interest rate cuts is unclear.
Other labour market data suggests that just five industries added jobs last month. In particular, the education and health services sector, as well as the leisure and hospitality sector played a large role in this uptick. What public sector job growth concealed private sector had huge job losses across the board. In contrast, government employment flourished, tacking on 13,000 new jobs. This paints an incredibly nuanced picture of the labour landscape as the economy continues to throw us curveballs.
Unemployment Rate and Wage Growth
In a positive sign, the unemployment rate fell to 4.4%, a drop from November’s 4.6%. This drop indicates that even though overall job growth remains weak, a greater percentage of people who want jobs are able to find one. At the same time, wage growth saw a healthy bump up, climbing back up to 3.8% from last month’s 3.6%. Wage gains would help change the prevailing dynamic within the Federal Reserve. They could help tip the balance against those policymakers who would like to see a substantially tighter monetary policy.
Wage growth and declining unemployment rates both have bright spots. On balance, the overall job market continues to experience low hiring and low firing. This odd juxtaposition underscores a continued booming labour market running on eggshells. The bottom line: Judging by the latest data, productivity is booming on the strength of booming GDP growth. The labor market isn’t growing fast enough to warrant such a heavy-handed, sustained monetary easing.
Impact on Federal Reserve Policy
While the mixed labour market report is important, it has major dovish implications for near-term Federal Reserve action. Analysts quickly revised their forecasts for when the Fed would begin cutting interest rates in response to this data. Currently, there is only a 5% chance of a rate cut during the upcoming Federal Open Market Committee meeting scheduled for January 28. The market is still looking for two cuts over the course of the year as it considers the balancing act being played by mixed economic signals.
The drop in unemployment and the increase in wage growth might be enough to fire up hawkish Federal Reserve types. They will likely urge a harder line on monetary policy. As policymakers deliberate over potential interest rate adjustments, these recent findings may prompt a reevaluation of their approach to monetary policy.
Economic Context and Future Outlook
The broader economic context reveals that despite a challenging labour market, strong GDP growth suggests there are productivity advances beneath the surface. This confusing new reality creates a paradox in which economic output is robust, but job creation is anemic. Taken together, it’s possible that business are simply more productive without adding as many jobs to their bottom line.