Nonfarm employment beat expectations in December, increasing 216,000, although after downward revisions of 71,000 to prior months the level of employment came in close to what was anticipated.  There were also mixed messages from the other details of the report. In the establishment survey, average hourly earnings increased a solid 0.4%, but the average workweek ticked down to 34.3 hours. In the household survey, the unemployment rate held unchanged at a low 3.7%, but the labor force participation rate slumped three tenths to 62.5% and the volatile household measure of employment plunged 683,000. Stepping back, labor demand has been gradually cooling. Job growth averaged 165,000 in the fourth quarter, the weakest quarter of the expansion though still above what’s required to meet the growth in the population. Similarly, wages grew at a 3.7% annual rate last quarter, the weakest pace since late 2020 though still probably a little too hot from a labor cost and inflation perspective. We believe the apparent resilience of the labor market should dial down expectations of a Fed rate cut in 1Q, and we still look for easing to begin at the June meeting. We continue to track 4Q annualized real GDP growth around 2.0% and look for the economy and the labor market to continue to slow heading into 2024.

In the establishment survey government employment growth was strong again, up another 52,000 last month, mostly at the local level. The 164,000 gain in private employment was anchored by private education and health services, up 74,000, and leisure and hospitality, up 40,000. Temp help was weak again last month, down another 33,000. Revisions continue to be biased lower, and October was the 9^th month out of 10 last year to ultimately revise down. While the average workweek for all workers has bounced between 33.3 and 33.4 hours for most of last year, the workweek for production and supervisory workers moved down to 33.7 hours last month, the lowest of the expansion. With modest upward revisions to prior months, average hourly earnings ticked up to 4.1% on a year-ago basis. Earnings for production and supervisory workers were up 0.3% last month, and year-ago earnings growth for these workers slipped to 4.3%. Aggregate hours worked increased at a modest 0.8% rate last quarter and total labor income grew at a 4.5% rate. The latter figure is the second lowest of the expansion though still pretty decent—particularly with core prices now only increasing at around a 2% rate.

Turning to the household survey, the large 683,000 decline in the volatile household measure of employment was the biggest decline of the expansion, and the payroll-concept adjusted measure was down an even larger 753,000. The 1.8 million year-ago increase in household employment is now running 1.0 million below the establishment survey measure. The decline in the participation rate was experienced by both men and women, by young, prime-age, and older workers, and by all racial groups. It’s hard to pinpoint the cause of this decline but it could reflect a little giveback from earlier outperformance. The setback in participation pulled the employment-to-population ratio down three tenths to 60.1%, the lowest reading of the year. An increase in the ranks of those working part time but who want full-time jobs caused the U-6 measure of labor market underutilization to tick up to 7.1%.