Lending Association

US jobs slowed in 2023, but real wages offer modest relief

In 2023, the US job market experienced a notable slowdown due to the impact of the Fed’s rate increases, which began to affect job creation and vacancies. However, real wages ended the year with a modest increase, raising concerns for the central bank and the possibility of keeping interest rates higher for a longer duration.

December’s job report revealed the addition of 216,000 new positions while maintaining an unchanged unemployment rate of 3.7%. What is particularly noteworthy is the rise in real wages, which continued to outpace inflation, providing a boost for American workers.

The growth in US hourly wages turning real, with wages outpacing falling consumer prices, started in May with a modest 0.2% increase. By December, this growth had reached 1%, following a 0.4% rise in December, exceeding forecasts. With an annual rate of 4.1% (compared to the forecasted 3.9%) and 4.3% in the final quarter of the year, these wage increases had a positive impact for millions of US workers, especially considering the inflation rate was hovering around 3.1%.

Economists are now questioning whether the positive job report will delay the Fed’s expected rate cuts in the coming months. The strong wages data, along with a decrease in first-time unemployment benefit claims and solid vacancy figures, may alter the perception that the Fed will implement rate cuts sooner than anticipated.

The next indicator to watch is December’s US inflation and producer price data. A recent rise in EU inflation, from 2.6% in November to 2.9% in the last month, has led economists to adjust their forecasts for US consumer prices, which are expected to increase from November’s 3.1% to 3.2% or 3.3%. However, the month-to-month rise may ease slightly from 0.3% in November to 0.25%.

The belief in an imminent rate cut by the Fed led to a surge in US markets in December, causing the US dollar to weaken and bond yields to decline. However, optimism waned recently, with the key 10-year bond yield rising to just over 4.03%. Friday’s job report initially caused Wall Street to fall, although it later bounced back slightly, but this couldn’t prevent US stock markets from experiencing their first loss in nine weeks. The S&P 500 fell 1.5%, the Dow eased 0.6%, and the Nasdaq Composite saw a substantial decline of 3.3% for the week.

In summary, the US unemployment rate ended 2023 at 3.7%, slightly up from January but still below the peak of 3.8% observed in August through October. Despite the slowdown, the job market remained robust throughout the year, with unemployment consistently below 4%. New job additions in December were less than half of what was reported in January, highlighting the market’s weakening trend, aligning with the expectation of a softer economic landing for the US in the coming year.

Details from December’s report showed signs of a welcome weakness, which helped reassure investors. Payroll growth in December showed improvement compared to November but was still lower than expected. The wider unemployment measure, which includes discouraged workers and those with part-time jobs for economic reasons, edged higher to 7.1%.

The labor force participation rate decreased to 62.5%, reaching its lowest level since February, and job holders declined by 683,000, with an increase in those working multiple jobs by 222,000. In 2023, the US saw a total of 2.7 million job gains, with a monthly average of 225,000, a significant drop from the 4.8 million job gains and 399,000 monthly average in 2022.

Earlier figures in the week also indicated a decrease in job vacancies in November, with a ratio of 1.4 vacancies for every unemployed person, the lowest in over two years. Initial US unemployment benefit claims fell to a two-month low of 202,000 as 2023 came to an end.

In conclusion, the US job market began 2023 in a highly active state but gradually cooled throughout the year, remaining robust in December but not excessively so, thus reducing the urgency for further rate hikes.