Persistent US job growth, lowest unemployment in decades thwart Fed's rate push

The U.S. labor market refuses to break.

In spite of the Federal Reserve's best efforts to cool the domestic economy, hundreds of thousands of jobs continue to be added each month, unemployment remains near historic lows and wages continue to grow.

Employment increased by 223,000 in December 2022 and the unemployment rate inched down to 3.5%, its lowest level since 1969. Unemployment fell from 3.6% the previous month and 3.9% in December 2021, the U.S. Bureau of Labor Statistics reported Jan. 6.

The latest jobs report showed some signs of a mild chill in the labor market as December's gains were the lowest level of hiring since December 2020, when 115,000 jobs were lost. Meanwhile, the labor force participation rate edged up to 62.3%, from 62.2% in November, a sign that more Americans are seeking work. Still, the overall messages were clear: companies are still hiring, workers are still in demand and the Fed's push to combat inflation with higher interest rates is far from over.

"There are some signs of improvement here in terms of what the Fed is looking for," said Shannon Seery, an economist with Wells Fargo, in an interview. "But, overall, I'd say it demonstrates a tight labor market and the Fed is probably going to continue on its pace of tightening."

Beating expectations

December's job gains were above the 200,000 economists had expected for the month, according to Econoday estimates.

The largest jobs gains were in industries impacted by the pandemic, such as education and health services, which added 78,000 jobs in December, and leisure and hospitality, which added 67,000 jobs.

Significant layoffs in the tech sector, including announced plans from Amazon.com Inc. to cut more than 18,000 jobs this year, have yet to impact the overall labor market.

"I think it's still a story of 'right-sizing' particular industries more so than the state of economywide layoffs," Seery with Wells Fargo said.

Wages grew by 0.3% from November to December 2022, and wage growth from October to November was revised down to 0.4% from initial readings of 0.6%. While pay gains are slowing, they continue to grow as employers struggle to fill millions of open positions.

There were roughly 10.5 million job openings in November 2022, according to government data released Jan. 4, down from the peak of 11.9 million openings in March 2022 but well above pre-pandemic levels. There were an average of 7.2 million job openings throughout 2019.

The number of job openings in November 2022 remained nearly twice the number of unemployed workers.

Fed frustration

This persistent tightness in the labor market has frustrated Fed officials as wage growth continues to outpace the central bank's inflation goals. The Fed wants "restoration of balance between supply and demand in the labor market," Fed Chairman Jerome Powell said in a Nov. 30 speech.

To try to tame the fastest rise in inflation in 40 years, the Fed has increased its benchmark interest rate by 425 basis points since March 2022, with expectations that rates could remain high through much of this year.

While the latest jobs report is unlikely to alter the Fed's rate hike plans in the near term, it could be an encouraging sign for central bankers since a stronger labor market diminishes the odds of a recession, said Matthew Weller, global head of research with FOREX.com and City Index.

"I think this is what the Fed would want to see in terms of a soft landing," Weller said.