The U.S. jobs market is cooling off, but it’s still quite strong. Too strong, in fact, for the Federal Reserve. The central bank wants to see hiring slow even further to help prevent persistently high inflation.
Here’s what to watch in the December employment report on Friday morning:
Wall Street forecast
The number of new jobs created in December is forecast to slow to 180,000 from 263,000 in the prior month, according to a poll of economists by The Wall Street Journal. If so, it would be the smallest increase in two years.
Wall Street has been predicting a sharp slowdown in hiring since the summer, however, and it hasn’t happened as quickly as predicted.
Nor is the labor market cooling off as fast as the Fed would like. Chairman Jerome Powell said in a recent speech the economy only needs to add around 100,000 new jobs a month to soak up all the new workers entering the labor force.
The tight labor market is putting upward pressure on wages and contributing to persistently high inflation. Businesses have to pay more to attract new workers or retain current ones.
Worker pay
Average hourly wages have climbed 5.1% in the past year. The Fed wants to see wage growth slow toward pre-pandemic levels of 3% or less to help bring inflation down.
“The Fed remains laser focused on wage growth in its fight against inflation,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
Economists forecast a 0.4% gain in hourly wages in December. The yearly increase in wages is expected to stick close to 5%.
Unemployment rate
Wall Street DJIA,
More layoffs are expected as higher interest rates curb economic growth and reduce demand for labor. Some industries such as the tech sector are already suffering steeper job losses. But so far job losses have been small.
Read also: Here are the companies in the layoffs spotlight: Salesforce joins Intel, Google, HP, Amazon, Cisco
“Despite news headlines about widespread layoffs, nationwide layoff levels remain historically low across all company sizes,” said Julia Pollack, chief economist at Zip Recruiter.
The Fed predicted in December that the unemployment rate would rise to 4.6% this year — and many economists believe it could top 5% eventually.
Labor force
The share of the working-age population in the labor force has fallen since the summer and gotten stuck at around 62%. That means just 62 of every 100 people 16 or older are either working or looking for work.
The so-called participation rate is still more than a point below the pre-pandemic peak and underscores the severe shortage of labor. The rate is unlikely to increase sharply anytime soon, economists say.
Fed reaction
Senior Fed officials know the labor market is going to take a while to chill. What they want to see is a steady slowdown in job openings, hiring and wage growth — as well as a gradual increase in the number of people entering the labor force.
