Surging Job Market Could Prove Costly for Households and Businesses

WASHINGTON | The U.S. job market showed unexpected strength in December, with employers adding a robust 256,000 jobs, showcasing the economy's endurance despite high interest rates.

The latest report from the Labor Department indicated a growth of 212,000 jobs from November to December.

Throughout 2024, job creation has continued steadily, with a total of 2.2 million new jobs added. However, this growth has started to slow down, moving away from the rapid hiring seen in previous years just after the pandemic. Comparatively, the number of jobs added in 2024 is less than the 3 million in 2023, 4.5 million in 2022, and the remarkable 6.4 million jobs recorded in 2021, as the economy rebounded from significant pandemic-related layoffs.

Adding 256,000 jobs in a single month is considered impressive, especially when compared to the average of 190,000 jobs created monthly in the five years before the pandemic.

This job growth in December far exceeded economists' expectations of 155,000 new jobs, and the unemployment rate, anticipated to remain around 4.2%, actually fell to 4.1%. The healthcare sector led the hiring with 46,000 jobs, followed by retailers adding 43,000 jobs, and government agencies contributing 33,000. However, the manufacturing sector saw a decline, losing 13,000 jobs.

In response to the December jobs report, U.S. markets experienced a drop, as the likelihood of the Federal Reserve reducing interest rates quickly diminished. The economy appears resilient and does not seem to require additional support.

Despite the strong job growth, Americans face high rates when purchasing homes or financing items like cars and appliances. Mortgage rates have increased for the fourth week in a row, reaching their highest levels since July.

Wage growth remains relatively modest, with average hourly earnings rising by 0.3% from November, bringing the year-over-year increase to 3.9%. This annual wage gain was slightly lower than many economists had projected.

Recent revisions from the Labor Department reduced the previous job numbers for October and November by 8,000 jobs.

Many factors have complicated the assessment of the U.S. job market in recent months. Events like hurricanes and high-profile strikes, such as one at Boeing, distorted the job figures for October, leading to an exaggerated rebound in November.

Economists remain cautious but optimistic. Thomas Simons, chief U.S. economist at Jefferies, noted that seasonal adjustments during the holiday season might have influenced the December data. Yet, he felt positive about the overall outcomes presented in the report.

Gus Faucher, chief economist at PNC Financial Services Group, was encouraged by the combination of strong job creation, a declining unemployment rate, and modest wage increases, which could ease inflationary pressures. In his view, the overall economic indicators looked very promising.

In light of the past few years, the strength of the U.S. economy and job market has taken many observers by surprise. Following a peak in inflation nearly three years ago, the Federal Reserve raised its benchmark interest rate—known as the fed funds rate—11 times in 2022 and 2023. As a result, rates reached their highest point in over two decades.

Such elevated borrowing costs were predicted to lead to a recession, but this did not occur; businesses kept hiring, and consumer spending continued. The U.S. gross domestic product has consistently grown at an annual rate of 3% or more in four of the past five quarters, demonstrating ongoing economic strength.

Job security has also improved for American workers, as layoffs are occurring at rates below pre-pandemic levels. Recently, only 211,000 Americans applied for unemployment benefits, marking the lowest figure in almost a year.

Inflation has declined as well, dropping from a peak of 9.1% in June 2022 to 2.7% by November. This decrease in price increases allowed the Federal Reserve to feel confident enough to lower rates three times in the last four months of 2024.

However, during their December meeting, Federal Reserve officials expressed caution regarding further rate cuts in the upcoming year. They currently expect just two rate reductions in 2025, a drop from the four they anticipated in September, as progress in combating inflation has stalled and remains above the Fed's 2% target.

The favorable jobs report decreases the likelihood of any interest rate cuts during the Fed's next meeting in January and may keep rates steady for an extended period. Sustained job growth could drive consumer spending and fuel economic expansion, but it also poses a risk of inflation staying elevated or rising again.

As a result, many economists do not foresee any rate cuts from the Fed until later this year, if they occur at all. According to economist Thomas Ryan from Capital Economics, "The odds have increased that the Fed is close to being finished with its rate cuts."

Jobs, Economy, Inflation