Labor market ends 2024 on high note

Bottom line

Nonfarm payrolls rose a much stronger-than-expected 256,000 jobs in December (consensus at 165,000, Federated Hermes at 179,000), with a modest combined downward revision of only 8,000 jobs in October and November. This likely represents a faster rebound from the storm- and strike-related job losses experienced in October, when the labor market posted an adjusted loss of about 100,000 jobs. Highlights include household employment rebounding by 478,000 jobs, after losing a combined 700,000 jobs in October and November, and the unemployment rate and average hourly earnings slipping a tenth of a point to annualized growth of 4.1% and 3.9%, respectively.

Next Fed cut probably pushed out While it was unlikely the Federal Reserve would entertain another interest rate cut at its upcoming January 29 policy-setting meeting anyway, today’s robust labor-market report has the bond vigilantes wondering whether an expected March 19 cut is also on hold and bond yields continued their recent rout. From 3.6% in mid-September, when the Fed issued a 50-basis point rate cut, yields on benchmark 10-year Treasuries have soared to around 4.75%, perhaps on their way to re-test resistance at 5.0%. We still think Fed officials will ultimately lower rates by a half point in 2025, with the first likely not arriving until June at the earliest.

The S&P 500 has followed suit recently, down nearly 5% over the past month, as investors trim some Mag 7 froth. Stocks had soared 19% from early August into early December, likely due to election-related enthusiasm. But the prospect of fiscal policy uncertainty from the Trump administration is sparking some much-welcomed profit taking. We believe these corrections could usher in attractive re-entry points for stock and bond investors.

Other key labor-market indicators:

• ADP private payroll survey December added a weaker-than-expected four-month low of 122,000 jobs (consensus at 140,000), down from 146,000 in November. Workers who changed jobs last month saw their wages rise 7.1% year-over-year (y/y), down from 7.2% in November and less than half of the cycle peak of 16.4% in June 2022. Job stayers in December earned a modest 4.6% y/y gain, down from 4.8% in November and well below a peak of 7.8% in September 2022. 
• Initial weekly jobless claims declined to an 11-month low of 201,000 last week. 
• Challenger, Gray & Christmas said the amount of layoffs announced by employers hit 38,792 in December, up 11.4% from a year ago but about one-third lower than in November. Technology accounted for 23% of total layoffs over the past six months.
• Job Openings & Labor Turnover Survey (JOLTS) for November surprisingly rose 3.3% month-over-month (m/m) to a six-month high of nearly 8.1 million, up from 7.84 million in October and the cycle low of 7.37 million in September. The rate of openings rose to 4.8% in November, up from 4.7% in October and a four-year low of 4.4% in September. The ratio of available job openings for each unemployed worker rose to 1.18, up from a more than three-year low of 1.09 in September. 

Unemployment and labor impairment rates decline, while participation rate flat Household employment soared by 478,000 jobs in December, after losing 273,000 and 346,000 in November and October, respectively. As a result, the number of unemployed people declined by 235,000, after rising by 149,000 in November and by 71,000 in October. The unemployment rate decreased slightly to 4.1% from 4.2%. Similarly, the labor impairment rate declined to 7.5% from 7.7%. The civilian labor force rose by 243,000, reversing declines of 124,000 and 275,00 workers in November and October, respectfully. That kept the participation rate unchanged at 62.5% for the third consecutive month, down from 62.7% in August and September. 

Wage inflation slows, hours worked flat Average hourly earnings slowed by an in-line 0.3% m/m in December (down a tick from November) and by a slower-than-expected 3.9% y/y (consensus at 4.0%). The Fed is targeting a 3% gain. But the improvement in wage inflation may be temporary due to workers returning after the storms and strikes in October. Average weekly hours worked remained unchanged at 34.3 in December for the fifth consecutive month. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before they downsize staff. 

K-shaped recovery gap narrows sharply The unemployment rate of highly educated workers declined to 2.4% in December from 2.5% in November and October. But that of less-educated workers plunged to 5.6% from 6.0% in November, 6.6% in October and 7.1% in August, again likely due to the hurricanes and work stoppages. This mix shift may have contributed to last month’s decline in wage inflation.

Sector details:

• Temporary help gained 5,000 jobs in December for the third time in the past four months, after losing jobs 29 times out of the previous 32 months. 
• Manufacturing lost a weaker-than-expected 13,000 jobs (consensus at a gain of 5,000), down from a gain of 25,000 in November. This sector has lost jobs in five of the past six months.
• Retail added a strong 43,000 jobs, reversing a loss of 29,000 jobs in November. October added 9,000 jobs, at the start of the important Christmas season. 
• Leisure & hospitality continued its rebound from the storms and strikes, adding 43,000 jobs in December and 52,000 in November, after losing 8,000 workers in October.