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Summary
- Much higher than expected NFP and other data sources show still-strong labour demand.
- By contrast, labour supply seems to be peaking and will likely suffer from fewer migrants under the incoming administration.
- Various indicators point to an already tight labour market, with signs the economy could be running out of easily employable workers.
- While wage growth is stable and in line with the Fed’s inflation target, further labour market tightening could lead to an acceleration.
Market Implications
- I expect the Fed to remain on hold in 2025, against markets pricing about one cut.
Introducing the Labour Market Monitor
Welcome to the first edition of my Labour Market Monitor, which will provide a comprehensive, in-depth assessment of the US labour market. I will update it after the NFP and include other labour market data, for instance JOLTS and jobless claims. Comments gratefully received!
My main conclusions are that, for now, the labour market looks like a central banker’s nirvana – full employment and wages in line with the inflation target. But signs of tightening labour supply are emerging that could accelerate wages.
Labour Demand Remains Strong
December payrolls beat again by a large margin (Table 1). Sam’s model had predicted the direction of the surprise.
NFP and other data details continues to suggest strong labour demand:
- The three- and six-month headline averages have turned up (Chart 1).
- Private employment still accounts for the bulk of the payroll increases (Chart 2).
- December household employment increased by nearly 500k but only 100k when adjusted for payroll definitions (Chart 3). The payrolls (‘establishment’)/adjusted household surveys gap reflects that household employment levels are obtained by applying the survey results to the Census Bureau population estimates, which do not account for the ongoing immigration surge.
- The strong payroll data is consistent with the JOLTS data showing the net hiring rate is in line with the 2019 average (Chart 4).
- Hours worked were unchanged in December and remain lower than pre-pandemic, but this reflects a change in worker preferences rather than weaker labour demand (Charts 5 and 6).
Labour Supply Is Weakening
- The labour force (= labour supply = employment + unemployment) is shrinking. In December, it increased by 243k. But on a 3mma basis, it is below its September 2024 peak (Chart 7). This result reflects the undercounting of immigrants in the household survey (from which the labour force is estimated) and US population aging. But that is not the only factor.
- Participation rates, more reliable than participation levels, have been falling (Charts 8 and 9).
- The share of migrants in the labour force picked up by the household survey is stabilizing, which could indicate fewer migrants. However, the data must be interpreted with caution as undocumented migrants are likely under-represented in the survey (Chart 10). Regardless, under the incoming administration, there will be fewer migrants, and the labour force could shrink further.
Tight Labour Market Could Tighten Further
- Unemployment was unchanged at 4.2% in December and has remained around 4% for the past two quarters, historically a low number (Chart 11). Employment to population ratios have been sliding, in line with participation.
- Jobless claims and overall insured unemployment have remained low (Chart 12).
- The share of unemployment accounted for by job leavers has been falling since the pandemic, but this likely reflects efforts by employers to retain existing workers (Chart 13). Job seekers continue to drive unemployment, a sign that jobs are abundant enough to make it worthwhile to look for a job.
- Among job losers, the share of permanent layoffs has increased but remains close to the 2019 average (Chart 14).
- The JOTLS ratios, unemployment and hires relative to vacancies also signal a market as tight or tighter than in 2019 (Chart 15).
- While unemployment duration has increased, this is likely a sign of reduced availability of quality workers rather than of lower demand – recessions initially lower unemployment duration because of the increase in newly unemployed (Chart 16). This time, the share of unemployed with spells longer than 15 weeks has been rising, which has added to the skew (mean-median) of duration distribution. This could reflect that, with reduced inflows in the job markets, those still looking for jobs are the most difficult to employ.
Wage Growth Is Stable, But for How Long?
- Average wage growth (Average Hourly Earnings) has stabilized around 4% since Q1 2024 (Chart 19). At the December presser, Chair Powell explained that based on recently higher productivity growth, this number is consistent with the 2% inflation target. But even if productivity reverted to its lower trend, Powell would see current wage growth ‘if anything, a little, still a bit above what would be sustainable’.
- And while the spread between job switchers and stayers has narrowed, I think this reflects employers’ efforts to reduce turnover rather than a loose labour market (Chart 20).
- Ahead, the risk is that further tightening of the labour market could see wage growth accelerate and become inconsistent with the Fed’s inflation target.
Market Consequences
Following Friday’s NFPs, markets moved closer to my view of no cuts this year and are now pricing one cut, from previously two.