Strong U.S. jobs, wages growth expected in December

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By Lucia Mutikani

WASHINGTON (Reuters) – The US economy likely maintained a solid pace of job and wage growth in December, but rising borrowing costs as the Federal Reserve fights inflation could slow labor market momentum significantly by mid-year.

Friday’s closely watched jobs report from the Labor Department is also expected to show an unchanged unemployment rate of 3.7% last month. The job market has remained strong since the Fed began raising interest rates at the fastest pace since the 1980s last March.

Interest-rate-sensitive industries like housing and finance, and tech companies including Twitter, Amazon and Facebook parent Meta, have cut jobs, but airlines, hotels, restaurants and bars are scrambling for workers as the leisure and hospitality industries continue to recover from the pandemic.

Job market resilience has supported the economy by supporting consumer spending, but could prompt the Fed to raise its target interest rate above the 5.1% peak forecast by the US Federal Reserve last month and leave it there for a while .

“Everything indicates that the labor market will remain strong,” said Sung Won Sohn, professor of finance and economics at the

Loyola Marymount University in Los Angeles. “Employers in the leisure and hospitality sectors are unable to get anyone even when wages have risen. That pattern has been and will continue for a while, so rubber is hitting the road.”

According to a Reuters poll of economists, the survey of business enterprises is expected to show that nonfarm payrolls rose by 200,000 last month, after rising by 263,000 in November. That would be the smallest gain in two years.

But job growth would be well above the pace needed to keep up with growth in the working-age population, comfortably in the range of 150,000 to 300,000, which economists associate with tight labor markets.

Estimates ranged from as low as 130,000 to the 350,000 predicted by TD Securities.

Data from payroll planning and tracking firm Homebase showed that employers held on to workers in December, suggesting a smaller-than-normal decline in non-seasonally adjusted (NSA) conditions.

SEASONAL BOOST

“That means the seasonal factor, which should adjust over a plus 200,000 NSA drop, would add a stronger number than expected,” said TD Securities macro strategist Oscar Munoz. “Seasonal adjustment has added about 430,000 jobs on average over the past five Decembers.”

A prolonged strike by 36,000 teachers in California is squeezing government payrolls. The government will revise the seasonally adjusted data for the household survey, from which the unemployment rate is derived, for the last five years.

Household employment fell in October and November, leading some economists to speculate that overall job growth was overstated. Some Fed officials have also subscribed to the divergence between the two measures.

However, the household survey tends to be volatile and most economists expect household employment to be revised towards nonfarm payrolls.

“Whenever trends in household employment have diverged from payrolls, corrections have tended to come through the correction in household employment to now stronger payrolls,” said Veronica Clark, an economist at Citigroup in New York. “We wouldn’t be surprised if we saw an even stronger rebound in household employment in December or in the coming months.”

The revision of household data has little impact on the unemployment rate. Average hourly earnings are expected to have risen 0.4% after rising 0.6% in November. That would bring annual wage growth down to 5.0% from 5.1% in November.

Strong wage growth is likely to continue in January as several states raise their minimum wages and most workers across the country receive cost-of-living adjustments. At the end of November there were 10.458 million job vacancies, equivalent to 1.74 jobs for every unemployed person.

However, the trend in employment growth could slow down significantly by the middle of the year. The Fed last year raised interest rates by 425 basis points from near zero to a range of 4.25% to 4.50%, the highest since late 2007. Last month it forecast borrowing costs to rise by at least another 75 basis points by the end from 2023.

Confidence among CEOs is at its lowest level since the Great Recession, according to a recent Conference Board poll.

“If they think demand is weakening and revenue is falling, they’re likely to feel pressure to cut costs to maintain profitability,” said James Knightley, chief international affairs economist at ING in New York. “That suggests the pace of job growth is likely to slow down fairly quickly this year, and we could actually see some job losses mid-year.”

(Reporting by Lucia Mutikani; Editing by David Gregorio)