US economy adds 216,000 jobs in December, beating expectations

The labor market ended 2023 on solid footing as job growth continued to chug along at a healthy pace in December.

Employers added 216,000 jobs in December, the Labor Department said in its monthly payroll report released Friday, topping the 170,000 gain forecast by Refinitiv economists. The unemployment rate held steady at 3.7%.

The report also contained sizable downward revisions to job growth during the previous two months. Gains for October and November were revised down by a total of 71,000 jobs to a respective 105,000 and 173,000, the government said, suggesting that the labor market is weaker than it previously appeared.

In total, the economy added about 2.7 million jobs over the course of 2023, down from 4.8 million in 2022.

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"The labor market and economy have normalized and are in a healthy place – not too hot, not too cold," said Sonu Varghese, global macro strategist at Carson Group.

In another show of strength for the economy, average hourly earnings – a key measure of inflation – increased 0.4% for the month and remained up 4.1% from the same time one year ago. Both of those figures came in slightly ahead of expectations.

The Federal Reserve has signaled that it is closely watching the report for evidence that the labor market is finally cooling after nearly two years of interest rate hikes. Policymakers voted last month to leave their benchmark rate unchanged for a third straight time and hinted they could soon begin cutting rates amid signs the economy is gradually slowing.

Stocks fell after the surprisingly strong jobs data diminished the odds of aggressive Fed rate cuts. Pricing suggests the odds of a March rate fell precipitously on Friday, according to the CME Group's FedWatch tool, which tracks trading.

The payroll number "probably disappointed bulls who have been riding expectations that a soft labor market will speed up rate cuts," said Chris Larkin, managing director of trading and investing at Morgan Stanley. "Data like this may pump the brakes a bit. For now, the name of the game is patience. Rate cuts are still the table, but investors will probably have to wait until the second half of the year." 

Larkin added: "And the Fed has made clear it’s prepared to go the other direction if it thinks inflation is on the rise again."

Fed officials are slated to hold their next policy-setting meeting at the end of January.

Job gains were mostly concentrated in a handful of sectors last month, with the biggest gains in the government (52,000), leisure and hospitality (40,000) and health care (37,700). Hiring in construction also trended upward.

Those gains helped to offset job losses in transportation and warehousing, the result of a steep drop in the number of couriers and messengers.

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The labor market has remained historically tight over the past year, defying economists' expectations for a slowdown. But there are some signs that cracks are beginning to appear after last year's blistering pace of growth. 

"Don’t be fooled by the strong job report for December," said Sung Won Sohn, professor of finance and economics at Loyola Marymount University. "The cooling trend in the labor market continues, Following a period of vigorous hiring after the pandemic, there's now a shift towards more cautious hiring strategies by businesses."