A Strong Labour Market

Sebastien Callebaut -

U.S. Labor Market Gains Momentum

The U.S. labor market continues to show signs of strength, offering relief to households and businesses but raising concerns within financial markets as the Fed might be forced to significantly reduce the pace of its rate reductions.

  • In December, the U.S. economy added 256,000 jobs, significantly exceeding economists' expectations of 155,000.
  • The unemployment rate edged down to 4.1%, also better than the anticipated 4.2%. These figures represent the largest monthly job gains since March, according to the Labor Department.
  • The robust December performance marked a recovery from the labor market's midyear slowdown and indicated growing economic momentum.

This improvement has effectively closed the door on the possibility of an interest rate cut at the Federal Reserve’s upcoming meeting on January 28-29. Additionally, it reduces the likelihood of rate cuts in March.

Moderating Wage Growth Provides Some Relief

Long-term Treasury yields rose, with the 10-year Treasury yield climbing to 4.77%, its highest level in over a year. This reflects investor concerns about the Federal Reserve’s potential policy response to the robust labor market data.

  • Wage growth continued to moderate, with average hourly earnings rising 0.3% in December to $35.69. While this increase aligns with expectations, it represents a slight deceleration compared to the previous month.
  • The slowdown supports the view that wage growth is not currently a significant driver of inflationary pressures.
  • For the year, the U.S. economy added 2.2 million jobs, more than double economists’ initial expectations. Around 75% of these gains were concentrated in three sectors: healthcare and social assistance, leisure and hospitality, and government.
  • However, in December, job creation extended to a broader range of industries, including retail, professional and business services, information, and finance, signaling resilience across the services sector.

The unemployment rate’s decline in December occurred despite an increase of 243,000 people entering the labor force, further underscoring the labor market’s strength.

Big Challenges

Economists now believe the latest job market data could signal the end of the Federal Reserve’s easing cycle. While an extended pause in rate changes remains the most likely scenario, the possibility of future rate increases has been placed back on the table, especially if inflation accelerates.

  • Minutes from the Federal Reserve’s December policy meeting revealed broad agreement among policymakers to hold interest rates steady in the near term, following a cumulative one-percentage-point reduction since September. The recent data reinforces this cautious stance.
  • While the labor market appears to have reached a sustainable level, other risks loom. Proposed policy changes by the incoming administration could alter the economic landscape.
  • Plans to curb immigration—a key source of new workers—may exacerbate post-pandemic labor shortages and contribute to wage pressures.

Additionally, proposed tariffs on top trading partners such as Mexico, Canada, and China are expected to increase prices for affected goods and could dampen economic growth. Policymakers at the Federal Reserve are taking a wait-and-see approach, given the uncertainty surrounding the implementation and potential impact of these policies.

Disclaimer

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Credits

Photo by Ferdinand Stöhr / Unsplash.