The U.S. labor market is losing momentum as hiring and wage growth cooled in December, showing the effects of slower economic growth and the Federal Reserve’s interest-rate increases.
After two straight years of record-setting payroll growth following the pandemic-related disruptions, the labor market is starting to show signs of stress. That suggests 2023 could bring slower hiring or outright job declines as the overall economy slows or tips into recession.
Employers added 223,000 jobs in December, the smallest gain in two years, the Labor Department said Friday. Average hourly earnings were up 4.6% in December from the previous year, the narrowest increase since mid-2021, and down from a March peak of 5.6%.
All told, employers added 4.5 million jobs in 2022, the second-best year of job creation after 2021, when the labor market rebounded from Covid-19 shutdowns and added 6.7 million jobs. Last year’s gains were concentrated in the first seven months of the year. More recent data and a wave of tech and finance-industry layoffs suggest the labor market, while still vibrant, is cooling.
“I do expect the economy to slow noticeably by June, and in the second half of the year we’ll see a greater pace of slowing if not outright contraction,” said
Joe Brusuelas,
chief economist at RSM U.S.
Friday’s report sent markets rallying as investors anticipated it would cause the Fed to slow its pace of rate increases. The central bank’s next policy meeting starts Jan. 31. The Fed’s aggressive rate increases aimed at combating inflation didn’t significantly cool 2022 hiring, but revisions to wage growth showed recent gains weren’t as brisk as previously thought.
The Dow Jones Industrial Average rose 700.53 points, or 2.13%, on Friday. The S&P 500 Index was up 2.28% and NASDAQ Composite Index advanced 2.56%. The benchmark 10-year Treasury yield declined 0.15 percentage point to 3.57%. Yields fall as bond prices rise.
The unemployment rate fell to 3.5% in December from 3.6% in November, matching readings earlier in 2022 and just before the pandemic began as a half-century low. Fed officials said last month the jobless rate would rise in 2023. December job gains were led by leisure and hospitality, healthcare and construction.
Historically low unemployment and solid hiring, however, might mask some signs of weakness. The labor force participation rate, which measures the share of adults working or looking for work, rose slightly to 62.3% in December but is still well below prepandemic levels, one possible factor that could make it harder for employers to fill open positions.
The average workweek has declined over the past two years and in December stood at 34.3 hours, the lowest since early 2020.
Hiring in temporary help services has fallen by 111,000 over the past five months, with job losses accelerating. That could be a sign that employers, faced with slowing demand, are reducing their employees’ hours and pulling back from temporary labor to avoid laying off workers.
The tech-heavy information sector lost 5,000 jobs in December, the Labor Department report showed. Retail saw a 9,000 rise in payrolls, snapping three straight months of declines.
Tech companies cut more jobs in 2022 than they did at the height of the Covid-19 pandemic, according to layoffs.fyi, which tracks industry job cuts. On Wednesday,
Salesforce Inc.
said it would cut 10% of its workforce, unwinding a hiring spree during the pandemic. The Wall Street Journal reported that
Amazon.com Inc.
would lay off 18,000 people, roughly 1.2% of its total workforce. Other companies, such as
parent
Meta Platforms Inc.,
DoorDash Inc.
and
Snap Inc.,
have also recently cut positions.
Companies in the interest-rate-sensitive housing and finance sectors, including
Redfin Corp.
,
Morgan Stanley
and
Goldman Sachs Group Inc.,
have also moved to reduce staff.
Nonfarm payrolls, change since the end of 2019
Months where overall jobs gained
Months where overall jobs declined
By the end of 2022, the U.S. had added nearly 2 million jobs since the end of 2019
More than 20 million jobs were lost near the start of the pandemic
Employment returns to prepandemic level
A monthly gain of more than 4 million jobs
Months where
overall jobs gained
Months where
overall jobs declined
By the end of 2022, the U.S. had added nearly 2 million jobs since the end of 2019
More than 20 million jobs were lost near the start of the pandemic
Employment returns to prepandemic level
A monthly gain of more than 4 million jobs
Months where
overall jobs gained
Months where
overall jobs declined
By the end of 2022, the U.S. had added nearly 2 million jobs since the end of 2019
More than 20 million jobs were lost near the start of the pandemic
Employment returns to prepandemic level
A monthly gain of more than 4 million jobs
Months where
overall jobs gained
Months where
overall jobs declined
By the end of 2022, the U.S. had added nearly 2 million jobs since the end of 2019
More than 20 million jobs were lost near the start of the pandemic
Employment returns to prepandemic level
A monthly gain of more than 4 million jobs
Months where
overall jobs gained
Months where
overall jobs declined
By the end of 2022, the U.S. had added nearly 2 million jobs since the end of 2019
More than 20 million jobs were lost near the start of the pandemic
Employment returns to prepandemic level
A monthly gain of more than 4 million jobs
Other data released this week point to a slowing U.S. economy. New orders for manufactured goods fell a seasonally adjusted 1.8% in November, the Commerce Department said Friday. Business surveys showed a contraction in economic activity in December, according to the Institute for Supply Management. Manufacturing firms posted the second-straight contraction following 29 months of expansion, and services firms snapped 30 straight months of growth in December.
Economists surveyed by The Wall Street Journal last fall saw a 63% probability of a U.S. recession in 2023. They saw the unemployment rate rising to 4.7% by December 2023.
“We’ve obviously been in a situation over the past few months where employment growth has been holding up surprisingly well and is slowing very gradually,” said
Andrew Hunter,
senior U.S. economist at Capital Economics. “There are starting to be a few signs that we’re maybe starting to see a bit more of a sharp deterioration.”
Max Rottersman, a 61-year-old independent software developer, said he had been very busy with consulting jobs during much of the pandemic. But that changed over the summer when work suddenly dried up.
“I’m very curious to see whether I’m in high demand in the next few months or whether—what I sort of expect will happen—there will be tons of firing,” he said.
Despite some signs of cooling, the labor market remains exceptionally strong. On Wednesday, the Labor Department reported that there were 10.5 million job openings at the end of November, unchanged from October, well more than the number of unemployed Americans seeking work.
Some of those open jobs are at Caleb Rice’s home-renovation business in Calhoun, Tenn., which has been consistently busy since the start of the pandemic. The small company has raised pay and gone to a four-day week in an effort to hold on to workers.
“If I could get three more skilled hands right now, I’d be comfortable,” Mr. Rice said. “The way it goes is I’ll hire five, two will show up and of those two one won’t be worth a flip.”
Fed officials have been trying to engineer a gradual cooling of the labor market by raising interest rates. Officials are worried that a too-strong labor market could lead to more rapid wage increases, which in turn could put upward pressure on inflation as firms raise prices to offset higher labor costs.
The central bank raised rates at each of its past seven meetings and has signaled more rate increases this year to bring inflation down from near 40-year highs. Fed officials will likely take comfort in the slowdown in wage gains, which could prompt them to raise rates at a slower pace, Mr. Brusuelas, the economist, said.
“We’re closer to the peak in the Fed policy rate than we were prior to the report, and the Fed can strongly consider a further slowing in the pace of its hikes,” he said. “We could plausibly see a 25-basis-point hike versus a 50-basis-point hike at the Feb. 1 meeting.”
Write to David Harrison at david.harrison@wsj.com
Corrections & Amplifications
A graphic in an earlier version of this article showing the change in nonfarm payrolls since the end of 2019 was incorrectly labeled as change since January 2020. (Corrected on Jan. 6)
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