U.S. Labor Market: A Clear Slowdown Despite Positive Headlines
January 15, 2024
The December employment report continued to reflect a gradual cooling in the labor market, aligning more with a soft landing than a recession. Non-farm payroll employment surpassed consensus expectations with a 216k increase compared to the anticipated 175k. However, the trend of downward revisions seen throughout 2023 persisted, with a downward adjustment of 71k for the preceding two months. Consequently, the three-month average change in non-farm payrolls dropped from 221k in September to 165k in December. Furthermore, the three-month average change for private payrolls fell to 115k in December from 153k in September. This indicates a noticeable slowdown in the pace of job growth.
The breadth of payroll employment growth continues to be narrow, primarily attributed to the government and healthcare sectors, which accounted for over half of the 216k increase. Healthcare employment, driven by the aging US population, remains 4.3% below its pre-pandemic trend. Government employment lags 2.4% below its pre-pandemic trend, with state and local education employment still below pre-pandemic levels. In the private sector, most employment gains came from two sectors – leisure and hospitality, and education and health – while employment growth outside of these sectors has come to a halt. Over the last six months, private payrolls have, on average, increased by 134k, with 127k stemming from these two sectors.
Lastly, in contrast to the establishment report that provides most of the above data, the household survey indicated a less robust labor market, displaying a decline of 683k jobs in December, coupled with a lower participation rate. The report also highlighted a significant divergence between full-time (-1,531 M-M) and part-time jobs (+762k M-M), indicating that more people are taking on part-time work than before. The household survey is notoriously more volatile than the establishment report, but the trend toward part-time work and multiple jobs has been consistent in recent months. In conclusion, a labor market rebalance is evident, with non-cyclical sectors showing more resiliency and cyclical sectors already weakening. The majority of the rebalance appears to be due to reduced labor demand (via fewer job openings) rather than layoffs, as reflected in the subdued level of initial weekly jobless claims. Job opening drops are the canary in the coal mine for labor statistics and typically layoffs are not far behind. In our view, this labor market backdrop supports the fixed-income market’s expectation for a material Fed policy pivot toward cuts in 2024.
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