U.S. job growth slows as Fed tightening takes effect

U.S. job growth slowed for a fifth straight month in December after aggressive rate hikes by the Federal Reserve squeezed economic activity, even as the U.S. labor market remained historically tight.

The world’s largest economy added 223,000 jobs in the final month of 2022, down from a downwardly revised 256,000 gain in November and well below last February’s peak of 714,000. Most economists had expected an increase of 200,000.

Following December’s increase, job creation averages 375,000 per month in 2022. The number of new jobs created has fallen every month since August.

The labor market has shown resilience despite the slowing pace of job growth, which could force the Federal Reserve to keep raising interest rates this year.

The data released by the US Bureau of Labor Statistics showed that the unemployment rate unexpectedly fell to 3.5%, returning to a historical low.

“It’s still a very tight labor market,” said Citigroup economist Veronica Clarke. “For economists, low unemployment [is] Future upside risks to wages. “

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The U.S. central bank is aggressively trying to cool the labor market and curb demand for new workers as it tries to ease price pressures that have pushed inflation to multi-decade highs. Since March, the Fed has raised its benchmark policy rate from near zero to just below 4.5%, one of the most aggressive moves in its history.

While the worst of the inflation shock appears to be behind us, price pressures have taken hold in the service sector of the economy. In an interview with the Financial Times this week, IMF First Deputy Managing Director Gita Gopinath urged the Fed to “stay the course” on tightening, arguing that U.S. inflation has not yet “turned the corner”.

Wages are rising at a pace that is far from the Fed’s 2 percent inflation target amid warnings from Fed officials that the worker shortage won’t be easily reversed.

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Average hourly earnings climbed another 0.3% in December, a weaker-than-expected increase and less than in the previous period. On an annualized basis, it rose 4.6%. The labor force participation rate, which tracks the proportion of Americans who are employed or looking for work, was little changed at 62.3%.

The largest job gains occurred in the leisure and hospitality industry, which added 67,000 jobs in December. Health care employment rose by 55,000, while construction added 28,000 jobs.

Industries with the least job growth included retail, manufacturing, transportation and warehousing.

In a statement issued after the report, President Joe Biden said the latest job gains reflected a “transition to steady and steady growth.”

“These historic job and unemployment gains are giving more power to workers and more breathing room to American families,” the U.S. president said amid a “tight cost of living.”

Federal Reserve policymakers have acknowledged that curbing inflation will require layoffs, leading to higher unemployment. With the benchmark policy rate above 5% and staying there for a long time, most officials expect the unemployment rate to hit as high as 4.6% this year and next, according to the Fed’s latest personal forecasts.

“Keep [above 5 per cent] Until we get evidence that inflation is actually coming down, that’s the message we’re really trying to get across,” outgoing Kansas City Fed President Esther George said Thursday.

Neil Kashkari of the Minneapolis Fed made similar comments this week, predicting the central bank will raise the federal funds rate by another percentage point in the coming months. This year, he will be a voting member of the policy-making Federal Open Market Committee.

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Traders of fed funds futures widely expect the Fed to head toward the so-called “terminal” level in smaller increments than the half-percentage-point and 0.75-percentage-point increases it has used throughout its tightening campaign. According to CME Group, there is now a 65% chance of a 25 basis point hike at the February meeting.

Buoyed by the prospect of a slower pace of rate hikes, the S&P 500 rose 0.7% in early New York trade, while the Nasdaq Composite rose 0.6%.

If the Fed follows through with its plan, economists warn that more real job losses are likely. Those polled last month in a joint survey by the Financial Times and the University of Chicago Booth School of Business’ Global Markets Initiative predicted unemployment would hit at least 5.5% next year as the economy slipped into recession.

Additional reporting by Harriet Clarfelt in New York

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