What US unemployment data says about the health of its economy

The US labor market once again remained stronger than expected, with 216,000 jobs created in December, compared with 173,000 in November, according to data published by the Labor Department on Friday.

The figure is well above the 162,000 job creation expected by analysts.

The unemployment rate remains unchanged at 3.7%, a historically low level, despite forecasts suggesting a modest rise.

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These solid figures have been released at a time when the Federal Reserve’s (Fed, central bank) decision to raise interest rates is having the expected effect of reducing demand and inflation.

The Labor Department indicated that wages increased 0.4% in December compared to the previous month. Compared to the same period last year, the average hourly wage increased by 4.1%.

Sectors where employment is increasing include public administration, health, social assistance and construction. Instead, jobs in transportation were lost.

In 2023, although sectors such as manufacturing and housing were hit hard by rising interest rates, a flexible labor market helped support consumption and the broader economy.

Unemployment and interest rates

Is the worst over and are we headed for a clean and robust recovery with low interest rates? This is the underlying question that arises with the most recent employment data in the United States.

December’s data capped a year in which the labor market managed its whirlwind recovery without falling into recession after recession, which was widely predicted for early 2023. Even though the Fed’s interest rates are at their highest level in two decades, a resilient labor market has driven steady consumer spending and healthy economic growth despite slowing inflation.

After the jobs report, traders cut bets on a Fed rate cut in March to about 50-50, while Treasury yields rose and U.S. stock futures fell.

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Labor demand and employers’ willingness to raise wages are likely to fuel Fed policymakers’ decision to keep rates high until they get more evidence that price increases are slowing across the economy. Is.

The participation rate – the proportion of the population working or looking for work – fell 0.3 percentage points to 62.5%, the biggest monthly decline in almost three years. The decline was concentrated among the youngest and oldest groups. For the group between 25-54 years old, participation declined by 0.1 points.

Sustained job growth and a further cooling in inflation will raise the possibility that Fed policymakers may achieve a dovish stance on the economy.

Central bankers are paying close attention to how labor supply and demand dynamics are affecting wage growth. Friday’s report showed average hourly earnings rose 4.1% through December 2022. Earnings for non-supervisory workers, who make up the majority of workers, rose 0.3% from November and 4.3% from a year earlier.

soft landing

Although many believe that as long as the labor market remains flexible and consumption remains high, the Fed is unlikely to lower rates, the possibility of a recession seems to be a thing of the past. At least this is the view of US Treasury Secretary Janet Yellen.

Yellen announced on Friday that the country’s economy had achieved a long-awaited soft landing, a historically unusual occurrence in which the government has managed to control high inflation without causing significant damage to the labor market.

“What we’re seeing now is I think we can describe it as a soft landing, and I expect that to continue,” the secretary said in an interview with CNN on Friday.

Yellen focused on the most recent wage data, which showed that average hourly earnings rose 4.1% in the year through December. Economists estimate consumer inflation for the year will be 3.2%, meaning wages will exceed price increases in 2023.

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“Wage increases now exceed price increases,” he said. “American workers are making progress and the progress for middle-income families is remarkable.”

Yellen declined to comment on what she thinks the Fed should do, but said the central bank has handled monetary policy well.

“The path the labor market, the economy and inflation have taken show that they have made many good decisions,” Yellen said.

For two years, the Treasury chief rejected the most negative projections for the US, even as the central bank implemented an aggressive campaign of rate hikes through most of 2022 and 2023. Although he never completely ruled out a recession, he repeatedly said he saw a so-called “path” to a soft landing.

In recent weeks, Yellen has been doing some “Olympic spin”: In December she said economists who predicted a recession were now “eating their words,” and she repeated her criticism on Friday.

“There’s a lot of pessimism around the economy that has really proven to be unwarranted,” he said. “A year ago, most forecasters believed we would be in a recession. Obviously this has not happened.”

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