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Few saw this coming.
A year ago, most economists envisioned a bleak 2023 for the United States. The economy, they warned, seemed sure to falter, probably sinking into a recession, with employers adding barely 100,000 jobs a month on average, enough to keep up with population growth but not much more.
No recession arrived. Instead, lots more jobs did — a monthly average last year of 225,000. The job market defied the doomsayers and shaken off the ever-higher interest rates that the Federal Reserve engineered to fight high inflation.
The economy, in fact, it delivered job growth at just about the ideal pace: Fast enough to support household incomes and job security yet not so fast as to accelerate inflation pressures. Inflation, which had erupted in 2021 and 2022, cooled throughout 2023, making it likelier that the Fed would achieve a “soft landing” — taming inflation without derailing the economy.
That Goldilocks picture is thought to have extended into the new year, with likely consequences for the 2024 presidential election: When the Labor Department issues the January jobs report Friday, it’s expected to show that employers added a solid 177,000 jobs, according to a survey of forecasters by the data firm FactSet.
“Job seekers still have plenty of job opportunities, employers are finding hiring less difficult and policymakers have been pleasantly surprised with prospects for a soft landing,’’ said Nick Bunker, economic research director for North America at the Indeed Hiring Lab.
A series of high-profile layoff announcements, from the likes of UPS, Google and Amazon, have raised some concerns about whether they might herald the start of a wave of job cuts. Yet measured against the nation’s vast labor force, the recent layoffs haven’t been significant enough to make a dent in the overall job market. Historically speaking, layoffs are still relatively low, hiring is still steady and the unemployment rate is still consistent with a healthy economy.
For January, the jobless rate is forecast to come in at 3.8%. That would be a tick up from December’s 3.7% but would still mark two straight years of unemployment below 4%, the longest such streak since the 1960s.
Consumers as a whole have proved more resilient than expected in the face of the Fed’s rate hikes. Having socked away savings during the pandemic, they were willing to spend it as the economy reopened. And a wave of early retirements, some of them related to COVID-19, limited the number of people available for work and contributed to a tight labor market.
The economy is sure to weigh on voters ahead of the presidential election. Despite signs of the economy’s fundamental strength, polls show that most Americans remain dissatisfied. A key factor is public exasperation with higher prices. Though inflation has been slowing for a year and a half, overall prices remain well above where they were when the inflation surge began.
Still, public spirits appear to be improving, gradually. A measure of consumer sentiment by the University of Michigan has jumped in the past two months by the most since 1991. A survey by the Federal Reserve Bank of New York found that Americans’ inflation expectations have reached their lowest point in nearly three years. And a new poll from The Associated Press-NORC Center for Public Affairs Research found that 35% of U.S. adults call the national economy good, up from 30% who said so late last year.
Diane Swonk, chief economist at the tax and consulting firm KPMG, said she expects a “January jobs boomlet” — 250,000 added jobs, well above the consensus. One reason is technical — seasonal factors. In January, businesses typically lay off much of the help they hired for the holiday shopping season. But in 2023, retailers didn’t hire as many holiday workers as usual, so there won’t be as many January layoffs to lower overall job growth.
Swonk also envisions strong hiring by healthcare companies and by state and local governments that are still flush with cash’’ and looking to fill vacancies that have been open since the economy began to recover from the pandemic recession.
The December jobs picture, healthy as it was, revealed a couple of blemishes that might have troubled the Fed: The number of Americans who either had a job or were looking for one — the labor force — dropped by a sizable 676,000.
From an inflation-fighting perspective, a smaller labor force means employers can’t be so choosy about hiring and might feel pressure to raise wages to keep or attract workers — and to increase their prices to make up for their higher labor costs. That cycle can perpetuate inflation.
And average hourly wages in December rose 4.1% from a year earlier, up from a 4% gain in November. Lydia Boussour, senior economist at the consulting firm EY, foresees another 4.1% year-over-year hourly wage gain for January. But she expects wage pressure to ease and for average annual pay growth to drop to 3.5% in the second half of 2023, roughly consistent with the Fed’s 2% inflation target.
The rate at which Americans are quitting their jobs, which Boussour calls a reliable predictor of wage trends, has slowed to pre-pandemic levels. That suggests that workers have grown less confident of finding a better job elsewhere. Employers, as a result, are less likely to feel pressure to raise wages to keep them.
Though hiring remains brisk, it has clearly slowed from the breakneck pace of a couple of years ago, a trend that is pleasing to the Fed and should help clear the way for rate cuts to begin later this year. The economy added a still-solid 2.7 million jobs last year, down from 4.8 million in 2022 and a record 7.3 million in 2021. Employers are posting fewer openings but not laying off many workers.
“It is still a good labor market for wages and finding a job, but it is getting back into balance, and that is what we want to see,’’ Chair Jerome Powell told reporters Wednesday after the Fed left rates unchanged but signaled its intention to start cutting them later this year.
