But Not Enough for Fed to Halt Rate Hikes

• Job growth slowed in line with expectations in December, with an increase in employment of 223,000. Job growth was revised lower in October and November.
• The unemployment rate fell to 3.5% in December, matching a 30-year low. Both household employment and the labor force increased over the month.
• Job gains were broad-based, although some industries are showing signs of weakness.
• Wage growth slowed in December, with downward revision to wage growth in October and November, welcome news on the inflation front.
• The labor market is moving in the right direction for the Fed, but the FOMC is still likely to increase the fed funds rate by 25 basis points next month.
• PNC expects a mild recession later in 2023.

The U.S. economy added 223,000 jobs in December according to a survey of employers, in line with expectations. Job growth has slowed throughout 2022 but remains too strong for the Federal Reserve. The unemployment rate fell to 3.5% in December, matching a 50-year low; the rate was 3.6% in November after revisions (previously 3.7%).

Job growth was 256,000 in November, revised lower from 263,000, and 263,000 in October, revised lower from 284,000. The three-month moving average of growth through December was 247,000, down from 263,000 in November and 580,000 at the beginning of 2022. Private-sector employment increased by 220,000 in December, while government employment rose by 3,000.

After declines in recent months, employment in a survey of households (different from the survey of employers) increased by a very strong 717,000 in December. The labor force-the number of people working or looking for work-increased by 439,000 over the month. The labor force participation rate, the share of adults in the labor force, increased to 62.3% from 62.2% in October and November. The labor force participation rate has been between 62.1% and 62.4% throughout 2022, well below the 63%+ rate before the pandemic, contributing to the tight labor market.

Goods-producing industries added 40,000 jobs in December, including gains of 8,000 in manufacturing and 20,000 in construction. Residential construction employment rose by 3,000 over the month, even as homebuilding is plummeting as high mortgage rates weigh on the housing market. Employment in private services-providing industries increased by 180,000 in December, including increases of 78,000 in education/health services, 67,000 in leisure/hospitality services, and 20,000 in trade/transportation/utilities. Employment fell in professional/business services by 6,000, the first decline since the spring of 2021. This included a big drop of 35,000 in temporary help, perhaps as businesses turn more cautious as economic growth slows.

Average hourly earnings increased 0.3% in December from November. Wage growth was revised lower in November to a 0.4% increase from the initially reported 0.6% gain, and in October to 0.3% from 0.5%. Average hourly earnings in December were up 4.6% from one year earlier, down from a cyclical peak of 5.6% in March 2022. Wage growth is slowing but remains strong, well above its pre-pandemic rate of around 3%.

The average workweek fell to 34.3 hours in December from 34.4 hours in November; this is the lowest it has been since March 2020, at the beginning of the pandemic. Employers are cutting back on hours as economic growth slows.

With a more jobs and higher wages, but a shorter workweek, total labor market income rose by 0.2% in December from November.

The labor market is moving in the right direction for the Federal Reserve, according to the December employment report, but is not there yet. Job growth is slowing to a more sustainable pace and wage growth is softening as demand in the job market slackens somewhat. But job growth is still running well above its-pandemic pace, the unemployment rate has returned to a 50-year low, and there is no indication of a surge in the labor force that would help cool off the job market.

To slow inflation the Fed wants softer job growth, probably of around 100,000 per month; weaker wage growth; and a slight uptick in the unemployment rate, indicating more labor market slack. With the rapid tightening in monetary policy over the course of 2022 showing up in slower job growth and wage gains, the Federal Open Market Committee will feel comfortable in increasing the fed funds rate by 25 basis points at its next meeting at the beginning of February. This is after a 50 basis point increase in the fed funds rate at the FOMC’s mid-December meeting, and 75 basis point increases at the four meetings before that.

The Fed hopes to raise interest rates by enough to slow growth and bring inflation back down to 2%, but not by so much that a recession ensues. However, given big increases in both short-term and long-term interest rates already, and with further fed funds rate hikes to come, the most likely outcome is a mild recession in 2023.