The December employment report showed a very strong labor market but much less evidence of inflationary pressures than in prior months. The unemployment rate fell back to 3.5 percent, its half-century low. The U-6 measure of labor market slack fell to 6.5 percent, its lowest level on record.

At the same time, wage growth moderated. There was a sharp downward revision to the November data. With 0.3 percent growth in the average hourly wage reported for December, the annualized rate over the last three months is just 4.1 percent, a sharp slowing from the 6 percent rate at the start of the year.

It also looks like we will see very good productivity growth in the fourth quarter of 2022. The index of aggregate hours fell 0.1 percent in December after falling 0.2 percent in November, leaving hours growing at an annual rate of 1.1 percent. GDP growth likely to be over 3 percent in the quarter suggests strong productivity growth, although a jump in reported self-employment will dampen the number.

Strong Job Growth Lead by Health Care and Leisure and Hospitality
The establishment survey reported a gain of 223,000 jobs in December, somewhat less than the 260,000 average for the prior two months. The growth was widely spread across sectors, but the gains of 54,700 in health care and 67,000 in the leisure and hospitality sectors accounted for half the total.

The growth in leisure and hospitality was disproportionately in the arts and entertainment component, which added 31,000 jobs. It is still down 135,000 jobs (5.4 percent) from its pre-pandemic level. Hotels added 10,000 jobs, and restaurants 26,300 jobs. Jobs in these sectors are down 16.3 percent and 3.6 percent, respectively, from pre-pandemic levels. 

Construction and Manufacturing Continue to Add Jobs

The construction sector added 28,000 jobs in December, while manufacturing added 8,000. These are traditionally the sectors hardest hit in a recession, but both are still adding jobs despite the Fed’s rate hikes. In the case of construction, even the residential component is still showing modest gains, adding 9,500 jobs. This is due to the large backlog of housing that remained unfinished due to supply chain issues.

In manufacturing there was a fall in employment in the non-durable component, which lost 16,000 jobs, in contrast to the growth of 24,000 in durables. This could be due to pressure from trade caused by the rise in the dollar, although it is worth noting that the dollar has fallen sharply in the last two months. The index of aggregate hours in the non-durable sector fell 0.8 percent in December, after falling 0.4 percent in November.

The clearest impact of the Fed’s rate hikes is probably in the sectors associated with mortgage issuance. Employment in non-depository credit intermediation fell 5,600 in December and is 41,100 below its peak earlier this year. Jobs in the category “activities related to credit intermediation” fell by 2,000 and are 16,600 below their peak.

Hard Hit Sectors Adding Jobs
Nursing homes and child care centers, which both have been having trouble finding workers due to low pay, both had good job growth in December. Nursing homes added 5,700 jobs and child care centers added 6,100. Employment in nursing homes is still 13.3 percent below its pre-pandemic level, while jobs in child care are down by 7.6 percent.

State governments lost 19,000 jobs in December, while local governments added 21,000 jobs. They are down 0.8 percent and 2.8 percent, respectively, from pre-pandemic levels.

Employment in Household Survey Jumps by 717K
Since March of last year, there has been a huge gap in job growth as shown in the establishment survey and employment growth in the household survey. This is partially corrected by a 717,000 jump in employment in the household survey. This was due to a modest 0.1 percentage point increase in the labor force participation rate (LFPR) and 0.2 percentage point drop in the unemployment rate.

There is still some room for further gains in LFPR. The prime age (ages 25 to 54) labor force participation rate is still 0.7 percentage point below its pre-pandemic peak. For men, it is down 1.1 percentage points while for women the drop is 0.6. 

Unemployment Rate and Employment Rate for People with Disabilities Both Hit Records
The unemployment rate for people with disabilities fell by 0.8 percentage point to 5.0 percent, the lowest rate on record. The employment rate edged up by 0.1 percentage point to 22.4 percent, also a record.

Share of Unemployment Due to Quits Edges Higher, but Still Below Peaks
The share of unemployment due to job leavers, which is usually seen as a measure of workers’ confidence in their labor market prospects, increased by 0.5 percentage point to 14.4 percent in December. This is consistent with a strong labor market but well below the peak of 15.8 percent in September and prior peaks that were over 15 percent. It suggests a strong but healthy labor market.

There was little change in the duration measures of unemployment. The average duration fell by 1.9 weeks to 19.5 weeks, but the median rose by 0.1 week to 8.9 weeks. The share of long-term unemployed (more than 26 weeks) fell by 1.8 percentage points to 18.5 percent, a new low for the recovery.

Strong, but Sustainable, Labor Market
This report shows a labor market that remains very strong, in spite of the Fed’s rate hikes, but with less evidence of inflationary pressures. The downward revision to November’s wage data leaves wages growing at a 4.1 percent annual rate over the last three months. This may be a hair higher than would be consistent with the Fed’s 2 percent inflation target, but it is clearly well below the peak rate of 6 percent at the start of 2022.  

Furthermore, the weakness in the hours data suggests that productivity growth will be strong in the fourth quarter, likely coming in at close to a 2 percent annual rate. Productivity data are erratic, so this crude calculation must be viewed with caution, but we seem to have recovered to at least a modest growth path after the declines in productivity reported for the first half of this year.

Finally, we continue to see a story where the strongest wage growth is at the bottom of the wage ladder. The annual rate of wage growth for production and nonsupervisory workers in the leisure and hospitality sector over the last three months was 7.8 percent. While most workers have seen wage growth that outstrips inflation this fall, real wage gains in this sector are far above the average.