The U.S. economy produced jobs at a slower but still comfortable rate at the end of 2022, as higher interest rates and changing consumer habits downshifted the labor market without bringing it to a halt.
Employers added 223,000 jobs in December on a seasonally adjusted basis, the Labor Department reported Friday, in line with economists’ expectations although the smallest gain since President Joe Biden took office.
The gradual cooling indicates that the economy may be coming back into balance after years of pandemic-era disruptions — so far with limited pain for workers. The unemployment rate ticked down to 3.5%, back to its level from early 2020, which matched a low last seen in 1969.
“If the U.S. economy is slipping into recession, nobody told the labor market,” said Chris Varvares, co-head of U.S. economics for S&P Global Market Intelligence, noting that the December number is still nearly double the approximately 100,000 jobs needed to keep up with population growth.
Stocks jumped on the news. The S&P 500 gained 2.3%, reflecting expectations that a slowdown in job growth and wage gains could reduce the pressure on prices and make the Federal Reserve less aggressive in raising interest rates.
The report brought job creation for the year to 4.5 million, pending revisions, as the economy continued to recover from its plunge in 2020. Still, total employment is still millions short of where it was headed before the pandemic, with job losses predicted in the year ahead.
The Biden administration trumpeted the report, calling it evidence that its economic agenda has been working. “For the last two months, we’ve seen good job growth, we’ve seen wage rates go up, and we’ve seen inflation pressures come down,” Labor Secretary Marty Walsh said in an interview. “I think it’s a slow and steady approach to bring down inflation and not worry about going into a recession.”
Avoiding a recession, of course, is far from guaranteed. That will depend on the Fed’s ability to edge interest rates just high enough to contain inflation but not so much that the economy enters a downward spiral — a balancing act that the Fed itself isn’t sure is possible.
The slowdown in hiring in recent months is a sign that the Fed’s strategy may finally be constraining the labor market, which remained a standout even as some drivers of economic activity started to sputter. Wage growth eased to 4.6% over a year ago, as the frenzy of people reshuffling into new jobs — and demanding better pay — has faded.
So far, layoffs and initial claims for unemployment insurance have remained extremely low, while the gap between the number of available workers and listed jobs is far larger than its historical average.
Nonetheless, the Fed forecast that the extremely low unemployment rate will rise to about 4.6% by the end of this year, as its interest rate increases force companies to retrench. For the Fed’s prediction to come true, employers would have to shed well over 1 million jobs in 2023.
“We’re not expecting to see job losses right now, but how do you get to 1 million jobs fewer over the next year?” asked Christine Cooper, chief U.S. economist at real estate data firm CoStar. “We’re going to have to see some negative numbers.”
December’s gains were driven by strong hiring in leisure and hospitality, which added 67,000 jobs, and health care, with 55,000. State government employment would have been significantly higher if not for a strike by 48,000 workers at the University of California. Even sectors that had been wobbling, such as retail, manufacturing, transportation and warehousing, eked out small increases.
But certain hard-hit industries such as hotels and restaurants still haven’t regained their prior strength, and have struggled to attract — and keep — enough workers to satisfy surging consumer demand. Others that had explosive growth while catering to COVID-era lifestyles are fading fast.
Interest rate increases have directly affected the labor market by taking the air out of the tech sector; the information services category dropped 5,000 jobs in December. That doesn’t include the bulk of 18,000 recently announced layoffs at Amazon, or the 8,000 at Salesforce.
Rising borrowing costs have also hamstrung home sales, resulting in sharp cuts at mortgage brokerages. But in an example of how backlogged demand is still powering even industries sensitive to interest rates, construction employers have continued to add jobs at a solid pace.
That could change soon, as order books stabilize. Erica Goodnight runs a lumber supplier in Harmony, North Carolina, that serves people building backyard sheds, barns and other outbuildings. The company did brisk business as homeowners added more space during the pandemic, but this year Goodnight is sitting tight on hiring.
“We’ve found a sweet spot,” Goodnight said. “I don’t necessarily foresee any openings. And honestly I think a lot of companies, if the employee will stay and show up for work, they’re not removing positions, because they got burned when they laid off employees in the beginning stages of COVID, and those folks didn’t come back.”
That steady easing is also evident in the number of hours the average worker puts in each week, a figure that has been falling for months and is now on the lower end of its pre-pandemic range.
Fed officials watch wage increases closely, concerned that they will continue to propel inflation as spending shifts from goods to services, where salaries largely drive prices. The cooler number in December may provide some reassurance that they can continue the path of stepping down interest rate increases that Fed Chair Jerome Powell communicated last month as inflation also subsided.
“That sort of orderly progression suggests that the economy is moving in ways that we will start to see that imbalance disappear,” Raphael Bostic, a Fed governor, said at a conference of economists in New Orleans Friday, while cautioning that he expected rates to remain high throughout 2023.
Over the past year, the darkest shadow over the labor market has been the glacial recovery in the share of people either working or looking for work, which remains about a percentage point lower than its level in February 2020. The rebound may be speeding up, as household savings accumulated during the pandemic have dwindled and fast inflation has pushed Americans to take on extra work.
Marshall Chandler would like to stop working, at 69, but his shrunken 401(k) account won’t let him. For the past three years, he has been selling high-end Swiss watches at Breguet on Fifth Avenue in New York, where he says his age is more of an asset than a handicap.
“I would not object to being retired now, but it’s just not realistic for me,” Chandler said. “If the market restrengthens and my health continues to be good, I hope to be able to retire in four to five years.”
The labor force participation rate ticked up slightly to 62.3% in December, as more than 400,000 people entered the labor force, most of them women.
That’s something Rebecca Rogers Tijerino, the president of Spherion Staffing and Recruiting, has noticed. More applicants have come through her company’s doors over the past quarter, allowing her to fill open listings more quickly.
Along with rising costs, headlines about a looming recession can also drive people to look for more solid positions. “We’ve seen people proactively concerned about the ‘R’ word,” Tijerino said. “If they’re not on firm ground with their current employer, they’re looking to make a change.”
The number of people employed by temporary help services — which historically dips as employers try to shed labor while keeping their permanent employees in an uncertain economic environment — dropped by 35,000, and is down 111,000 jobs since July.
Workers are not the only ones worried about a recession. Measures of corporate sentiment, like a recent survey of chief financial officers by the Federal Reserve Bank of Richmond, are at a low ebb, boding ill for employment gains in the coming year. The Institute for Supply Management found that manufacturing contracted for the second straight month in December, indicating that more companies see business worsening rather than getting better.
That’s why experts, while encouraged by the latest numbers, caution against declaring a premature happy ending to the pandemic recovery story.
“We’re reading that book, and it’s getting really good, but we’re not done,” said Kathryn Edwards, an adjunct economist at Rand Corp. “I would hate for the interpretation of this jobs report to be, ‘We did it.’”
This article originally appeared in The New York Times.
