What US unemployment data says about the state of the country’s economy

The U.S. labor market was again much stronger than expected in December, adding 216,000 jobs compared with 173,000 in November, according to data released Friday by the Labor Department.

This figure is significantly higher than the 162,000 new jobs expected by analysts.

The unemployment rate remains unchanged at 3.7%, a historically low level, despite forecasts suggesting a modest recovery.

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These solid numbers come at a time when the Federal Reserve’s (central bank) decision to raise interest rates is having the expected effect of reducing demand and inflation.

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

Among the sectors in which employment is growing are government, health care, social assistance and construction. Instead, there were job losses in transportation.

In 2023, although industries such as manufacturing and housing were hit hard by rising interest rates, a robust labor market helped support consumption and the overall economy.

Unemployment and interest rates

Is the worst already behind us and are we heading towards a clear and gradual economic recovery with lower interest rates? This is the main question that stands out in the most recent employment data in the United States.

The December numbers cap a year in which the labor market tempered its breakneck recovery from the pandemic without falling into the recession that was widely predicted at the start of 2023. The market contributed to stable consumer spending and healthy economic growth, even as inflation slowed.

After the jobs report, traders cut bets on the Fed cutting rates in March to around 50-50, while Treasury yields rose and U.S. stock futures fell.

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Worker demand and employers’ willingness to raise wages will likely support Fed policymakers’ decision to keep rates high until they see more evidence that price increases are slowing across the economy.

The participation rate – the share of the population who 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 among the youngest and oldest cohorts. For the 25-54 year old group, participation fell by 0.1 points.

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

Central bankers are paying close attention to how dynamics in labor supply and demand affect wage growth. Friday’s report showed average hourly wages increased 4.1% compared to December 2022. Earnings for nonsupervisory employees, who make up the majority of workers, increased 0.3% from November and 4.3% from the previous year.

Smooth landing

While many believe the Fed is unlikely to cut rates as long as the labor market remains strong and consumption remains strong, the possibility of a recession appears to be a thing of the past. At least, this is the view held by US Treasury Secretary Janet Yellen.

Yellen said Friday that the nation’s economy has achieved a long-awaited soft landing, a historically unusual event in which the government manages to control high inflation without causing significant damage to the labor market.

“What we’re seeing now, I think, can be described as a soft landing, and I hope that it continues,” the secretary of state said Friday in an interview with CNN.

Yellen focused on the latest wage data, which showed average hourly pay rose 4.1% in the year through December. Economists forecast consumer inflation for the year to be 3.2%, which would mean wages would outpace price growth in 2023.

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“Wage growth now exceeds price growth,” he said. “American workers are making progress, and the progress for middle-income families is very noticeable.”

Yellen declined to comment on what she thinks the Fed should do, but said the central bank is doing a good job of executing monetary policy.

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

For two years, the Treasury chief rejected the worst forecasts for the United States, even as the central bank pursued an aggressive campaign of rate hikes for much of 2022 and 2023. While she has never completely ruled out a recession, he has repeatedly said he sees a “path” to a so-called soft landing.

Yellen has made something of an “Olympic U-turn” in recent weeks: She said in December that economists who predicted a recession were now “eating their words,” and on Friday she repeated her criticism.

“There was a lot of pessimism around the economy that actually turned out to be unjustified,” he said. “A year ago, most forecasters believed we would fall into a recession. Obviously that didn’t happen.”

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