Today’s jobs report revealed that the labor market continued its growth in December, adding 216,000 persons to nonfarm payrolls. However, with downward revisions to both October and November data (cumulatively −71,000), the three-month average job growth declined to 165,000—wel l below the start of 2023, when monthly job growth was 312,000 (Chart 1). The softer trend in job gains align with earlier data showing companies are pulling back on hiring as interest rate increases have raised the cost of capital and slowed the economy.

Insights for What’s Ahead

• As we continue to anticipate a short and shallow recession later this year, hiring will likely continue to slow going forward.
• We anticipate negative payroll prints in the first half of 2024 and an increase in the unemployment rate to 4.3% by the third quarter.
• The anticipated weakness in the labor market will pale in comparison to that experienced during the Great Recession and the Pandemic. Nonetheless, it will weigh on consumer sentiment and activity.

Health care, Leisure and Hospitality, and Government Fuel Job Growth

Job growth was strong in 2023, with 2.7 million nonfarm payroll gains for the year, but clearly slower than the 4.5 million additions in 2022. Moreover, hiring in the second half of 2023 was far less robust than in the first half. Notably, job gains in the second half of the year were entirely from three sectors: health care and social assistance (506,000 jobs), leisure and hospitality (199,000 jobs), and government (355,000 jobs). Elsewhere, job gains were either flat or slightly negative. Transportation and warehousing, which grew rapidly following the start of the pandemic, shed 77,000 jobs over the last six months, and professional and business services employment fell by 70,000. Meanwhile, employment in temporary help services—an early indicator of slowdown in overall employment—continued falling in December, bringing the total losses to 147,000 over the last six months of 2023 and 310,000 since November 2022.

The pattern in the BLS data reflected business sentiment in The Conference Board Measure of CEO Confidence™ for the US, where most CEOs said that they are hoarding workers or engaging in mild layoffs. Mild layoffs have largely been limited to pandemic-darling industries like tech, finance, residential construction, and transportation that are now suffering amid higher interest rates and a shift in demand away from goods to services. The hoarding likely stems from an unwillingness to shed workers—even amid economic uncertainty—as CEOS continue to struggle with ongoing labor shortages and the increasing costs of attracting qualified labor.

What is the Outlook for the Three Sectors Driving Hiring?

It is unlikely that the three industries fueling most monthly nonfarm payroll gains can continue to support hiring going forward.

Employment growth in the healthcare sector is expected to remain positive, given its non-cyclical nature and its correlation with the aging demographic. Nevertheless, the sector’s employment expansion, which has surpassed typical patterns in recent months, is poised to decelerate in tandem with the broader economic slowdown.

Leisure and hospitality employment, despite being more susceptible to business cycle gyrations under normal circumstances, have yet to completely rebound from the losses incurred during the pandemic era. The sector may continue adding jobs even amid a brief and mild economic downturn.

The government sector has now recuperated from pandemic era losses and is now above 2019 levels. With the recent recovery, the prospect of additional job gains appears less probable. Moreover, if there is an economic downturn, the hit to state and local government tax intake may prompt layoffs and they are mandated to maintain balanced budgets.

With employment growth slowing in these industries, combined with potential job losses elsewhere, we project negative payroll prints by mid-2024.

Wage Pressures Continue to Moderate

In December, year-over-year growth in average weekly earnings was up by 3.8%. Although wage growth remains elevated, it now stands notably lower than the 5.6% level reached in February 2022.

Upward wage pressures largely reflected businesses’ response to labor shortages: raising wages to attract talent and prevent quitting. Additionally, elevated inflation for inputs for businesses and goods and services for consumers likely also influenced some of the upward pressure on wages.

Normalized quits, fewer job openings, reduced hiring according to JOLTS data and slower inflation suggests less pressure on wages in 2024.

Labor Force Participation Continues to be Capped by Older Workers

The labor force participation rate saw a decline to 62.5% in December, compared to 62.8% in November. Individuals aged 16-64 continue to increase their participation in the labor force, with the rate declining to 75.1% in November to 74.7% in December, remaining above February 2020 levels by 0.3 ppts.

Meanwhile, those aged 65 and over are maintaining a more reserved stance, as the participation rate was 19.1% in December, remaining 1.5 ppts below the levels observed in February 2020. Reduced participation among older workers continues to reflect retirements, and in some cases early exits, by Baby Boomers.

The decline in the labor force participation coincided with the widened gap in employment estimates between the household survey which the labor force participation (and unemployment) rates are based on and the payroll survey. The divergence will most likely normalize when the household survey completes its annual revisions next month.

Looser Labor Markets to Impact Demographic Cohorts Differently

Looser labor markets are likely to exert a more significant impact on younger workers, individuals with lower educational attainment, and minority groups.

In December, the unemployment rate remained flat at 3.7%, and is now 0.3 ppts above the post pandemic low it reached in April 2023. Looking at different demographic groups, the unemployment rate (3-month average) among younger workers (age 16-24) is now up by 1.2 ppts from its post-pandemic low of 7.1% in May 2023 (Chart 2). In contrast, the rate for those aged 25 and above experienced a more modest uptick of 0.3 ppts from its post-pandemic low in February 2023. Younger workers often work in jobs with high turnover making them more vulnerable to job losses as the labor market weakens.

The unemployment rate increased by 1.4 ppts from January 2023 among those who have less than a high school degree and by 0.5 ppts from February among workers with high school degree. In the meantime, workers with some college education and with college degrees are only 0.1 and 0.2 ppts off from their respective post pandemic lows. The data suggests that more highly educated workers are at a premium given their skills, but also that less educated workers may be in fields suffering from greater layoffs.

Unemployment rates for Hispanic/Latino workers rose by 0.8 ppts from its low in November 2022, whereas the rates increased by 0.6 ppts among Asian, 0.5 ppts among Black and by 0.3 ppts among White workers from their lows in January. Potentially, the larger increase in unemployment rates for select minority group workers is because they tend to be employed in sectors (for instance transportation and warehousing for Black workers and construction for Hispanic/Latino workers) prone to layoffs and high turnover rates.

Anticipating deceleration in the U.S. economy in 2024, we project the unemployment rate will climb to 4.3% by the third quarter of 2024. While the increase would be relatively small compared to past recessions, the change from the low of 3.4% in recent years is still dramatic. Importantly, joblessness is likely to be felt more profoundly by younger people, less educated workers, and minorities groups if the recent trends continue.