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A man walks past a now hiring sign at a CVS Pharmacy, in San Francisco, Calif., on May 7, 2020.Jeff Chiu/The Associated Press

The U.S. economy added jobs at a solid clip in December, pushing the unemployment rate back to a pre-pandemic low of 3.5 per cent as the labour market remains tight, but Federal Reserve officials could draw some solace from a moderation in wage gains.

Still, the U.S. central bank’s fight against inflation is far from being won. The Labor Department’s closely watched employment report on Friday also showed household employment increasing by a whopping 717,000 jobs last month.

Recent declines in household employment had fanned speculation that nonfarm payrolls, the main measure of employment gains, were overstating job growth.

The labour market has remained strong, despite the Fed embarking last March on its fastest interest rate-hiking since the 1980s. It is underpinning the economy by sustaining consumer spending. But the economy’s resilience raises the risk the Fed could lift its target interest rate above the 5.1 per cent peak the central bank projected last month and keep it there for a while.

“The labour market remains resilient but is losing pep and worker shortages remain intense,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “While wage growth has moderated, it’s still far from consistent with price stability. Don’t look for the Fed to ratchet down its hawkish talk or slow the pace of rate hikes on February 1.”

Nonfarm payrolls increased 223,000 last month. Data for November was revised lower to show 256,000 jobs added instead of 263,000 as previously reported. Economists polled by Reuters had forecast payrolls increasing by 200,000 jobs, with estimates ranging from 130,000 to 350,000.

The economy added 4.5 million jobs in 2022, with employment gains averaging 375,000 per month.

Employment gains last month were led by the leisure and hospitality industry, which added 67,000 jobs. Restaurants and bars as well as amusement parks, gambling and recreation places accounted for the bulk of the increase in hiring.

Leisure and hospitality payrolls remain 932,000 below their pre-pandemic level.

Healthcare industry employment increased by 55,000 jobs. Construction payrolls rose 28,000, despite the house market collapsing under the weight of higher borrowing costs. Manufacturing employment rose 8,000. There were also gains in transportation and warehousing payrolls as well as retail.

Government employment rose 3,000, though a strike by 36,000 university employees in California hurt state government education payrolls which fell 24,000.

Average hourly earnings rose 0.3 per cent after increasing 0.4 per cent in the prior month. That lowered the year-on-year increase in wages to 4.6 per cent from 4.8 per cent in November. Wages growth could pick up in January as several states raise their minimum wage and most workers across the country get cost of living adjustments.

U.S. stocks opened higher on the moderation in wage growth. The dollar was little changed against a basket of currencies. U.S. Treasury prices were mixed.

“The market may be rejoicing that wage inflation is slowing, but for how long if the lowest unemployment rate in history means there is no one left to employ,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Higher wages are coming.”

Government data this week showed there were 10.458 million job openings at the end of November, which translated to 1.74 jobs for every unemployed person.

The average workweek dipped to 34.3 hours from 34.4 hours in November, which some economists interpreted as a sign that the labour market was starting to weaken.

The unemployment rate dropped to 3.5 per cent from 3.6 per cent in November. The decline reflected robust household employment, which offset an increase in the labour force. The government revised the seasonally adjusted data for the household survey, from which the unemployment rate is derived, for the last five years.

The trend in employment growth, however, could slow significantly by mid-year as expensive credit weighs on consumer spending and ultimately business investment.

The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 per cent-4.50 per cent range, the highest since late 2007. Last month, it projected at least an additional 75 basis points of hikes in borrowing costs by the end of 2023.

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