What US unemployment data says about the health of its economy

The US labor market was stronger than expected in December, with 216,000 jobs created, compared with 173,000 in November, according to figures released by the Labor Department on Friday.

The figure was higher than the 162,000 job creation expected by analysts.

The unemployment rate remains at 3.7%, a historically low level, despite forecasts that expect a slight recovery.

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These solid numbers have been released at a time when the Federal Reserve’s (Fed, Central Bank) decision to raise interest rates is having the desired effects of reducing demand and inflation.

Wages rose 0.4% in December from the previous month, the Labor Department indicated. Compared to the same period last year, average hourly wages increased by 4.1%.

Sectors where employment is growing include public administration, health, social assistance and construction. Instead, there were job losses in transportation.

In 2023, a resilient labor market supported consumption and the broader economy, although sectors such as manufacturing and housing were hit hard by rising interest rates.

Unemployment and interest rates

Is the worst over and are we headed for a clear and advanced recovery with low interest rates? That’s the underlying question that emerges with the most recent data on employment in the United States.

December’s figures capped a year out of its sluggish post-pandemic recovery, without the labor market falling into the recession widely predicted as early as 2023. With Fed interest rates at their highest level in two decades, a resilient labor market has driven steady consumer spending and healthy economic growth even as inflation has slowed.

After the Jobs report, traders cut bets on a Fed rate cut in March to around 50-50, while Treasury yields rose and US stock futures fell.

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Workers’ demand and employers’ willingness to raise wages are likely to fuel Fed policymakers’ decision to keep rates elevated until they see more evidence that price increases are cooling across the economy.

The participation rate – the proportion of the population that is working or looking for work – fell 0.3 percentage points to 62.5%, the biggest monthly decline in nearly three years. The decline was concentrated in the youngest and oldest groups. For the 25-54 age group, participation fell by 0.1 points.

Sustained job growth and further cooling in inflation will boost the prospects that Fed policymakers can achieve a soft landing for the economy.

Central bankers are paying close attention to how labor supply and demand dynamics are affecting wage growth. Friday’s report showed average hourly earnings rose 4.1% since December 2022. Earnings for non-supervisory employees, who make up the majority of workers, rose 0.3% from November and 4.3% from a year earlier.

Soft landing

Although many believe the Fed is unlikely to cut rates as long as the labor market remains resilient and consumption remains high, the prospect of a recession appears to be a thing of the past. At least that’s the perspective that Janet Yellen, the US Treasury Secretary, holds.

Yellen declared on Friday that the nation’s economy had achieved a long-awaited soft landing, a historically unusual event in which the government manages high inflation without significantly harming the labor market.

“What we’re seeing now is what I think we can describe as a soft landing, and I hope that continues,” the secretary said in an interview with CNN on Friday.

Yellen focused on the most recent wage data, which showed average hourly earnings rose 4.1% in the year to December. Economists estimate that consumer inflation will be 3.2% for the year, meaning wages will outpace price growth in 2023.

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“Wage increases now outpace price increases,” he said. “American workers are making progress, and the progress for middle-income families is remarkable.”

Yellen declined to comment on what the Fed should do, but said the central bank has handled monetary policy well.

“The path that the labor market, the economy and inflation have taken suggests they’ve made a lot of good decisions,” Yellen said.

For two years, the Treasury chief led the U.S. rejected the most negative projections for 2022, even as the central bank implemented an aggressive campaign of rate hikes throughout 2022 and 2023. Although she never completely denied recession, she often said she saw recession. The “path” of the so-called soft landing.

In recent weeks, Yellen has been putting on something of an “Olympic spin”: In December she said economists predicting a recession were now “eating their words,” and she reiterated her criticism on Friday.

“There’s a lot of pessimism around the economy that has turned out to be really unwarranted,” he said. “A year ago, most forecasters believed we would be in a recession. Apparently that didn’t happen.”

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