Economic Update: January 2024

December’s payroll gains were primarily monopolized by three categories: education and health, leisure and hospitality, and government, with more than half of last month’s gains coming from healthcare and government alone. Healthcare hiring continues to accelerate as market forces such as the aging of the U.S. population and Covid-19 fuel demand. Meanwhile, leisure and hospitality have maintained the highest hiring rate among all industries since 2020 and are slowly inching closer to their pre-pandemic levels. However, even though job growth continues to be promising, its concentration in just a few industries across 2023 is a likely sign that the labor market is beginning to lose some steam. December recorded further job losses in the transportation and warehousing industry and saw temporary help services cut 33,000 jobs. As we’ve discussed before, temp help services can often be the canary in the coal mine for broader changes ahead as companies attempt to avoid laying off permanent staff.

Wage gains were surprisingly robust last month, with average hourly wages rising 4.1% annually, a good tick above predictions of 3.9%. While good news for workers, Fed Chair Jerome Powell believes readings above 4 percent remain troublesome for inflation reduction, so December’s report will likely keep officials on their toes.

Now, briefly back to the divergence in the two surveys last month: the household survey is again countering the otherwise strong December establishment survey, with the chief concern being the dramatic dip in the participation rate. But as we discussed in October, it is essential to remember that the small sample size of the household survey makes it a more volatile series.

Inflation is also showing some signs of continued easing. The latest consumer price index (excluding the more volatile food and fuel measures) increased 3.8% in December over last year, representing the smallest increase since May 2021. That’s good news, as it appears we’re continuing to see the Fed’s tightening campaign pay off.

Looking into the rearview mirror to 2023, how should we think about the way the year concluded?

“The way it’s played out, we’ve kind of had an economy where we’ve had our cake and been able to eat it too… [2023 was] an exceptional year in terms of labor supply, and it’s hard to see that persisting” observed Jonathan Millar, senior economist at Barclays.

2023 began with unemployment at 3.4%, matching lows not seen since the late 1960s, and remains restrained despite the slight uptick in the year’s final months. An expanded pool of available talent drove the tight labor market’s easing as immigration levels rebounded and more prime-age Americans returned to the workforce, helping to reduce labor shortages. And while inflation continues to be a primary pain point for consumers, the inflation rate has cooled significantly in the last 12 months. At the same time, actual wages rose throughout the year, eventually outstripping price increases. The US consumer overall has remained resilient: last year marked the first that travel rebounded since the pandemic, with the recent Thanksgiving travel period shattering previous records. Those pay increases likely buoyed the year’s surge in consumer spending, though continued robust spending in 2024 seems less likely, with household debt also at an all-time high. Lastly, we can probably declare victory over the possibility of imminent recession – at least for now. Entering 2023, economists and experts nearly unanimously predicted that a recession was coming. Today, according to a December poll by the National Association for Business Economics, most economists (76%) believe that the chance of a recession in the next 12 months is 50% or less.

It is probably safe to say that 2023 was a year of unexpected and mostly welcome surprises.