US job growth solid in December; unemployment rate falls to 3.5%

The US economy maintained a strong pace of job growth in December, with the unemployment rate falling to 3.5 per cent, but higher borrowing costs as the Federal Reserve fights inflation could see the labor market momentum slowing significantly by midyear.

Nonfarm payrolls increased 223,000 last month, the Labor Department said in its closely watched employment report on Friday. Data for November was revised lower to show 256,000 jobs added instead of 263,000 as previously reported.

Economists polled by Reuters had forecast payrolls increasing by 200,000 jobs. Monthly job growth is well above the pace needed to keep up with growth in the working age population.

The unemployment rate dropped to 3.5 per cent from 3.6 per cent in November. The government revised the seasonally adjusted data for the household survey, from which the unemployment rate is derived, for the last five years.

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Average hourly earnings rose 0.3 per cent after 0.4 per cent in the prior month. That lowered the year-on-year increase in wages to 4.6 per cent from 4.8 per cent in November. Government data this week showed there were 10.458 million job openings at the end of November, which translated to 1.74 jobs for every unemployed person.

The labor market has remained strong, despite the Fed embarking last March on its fastest interest rate-hiking since the 1980s.

Interest-rate sensitive industries like housing and finance, and technology companies, including Twitter, Amazon and Meta, the parent of Facebook, have slashed jobs. However, airlines, hotels, restaurants and bars are desperate for workers as the leisure and hospitality industry continues to recover from the COVID-19 pandemic.

Labor market resilience is underpinning the economy by sustaining consumer spending. But it raises the risk the Fed could lift its target interest rate above the 5.1 per cent peak the U.S. central bank projected last month and keep it there for a while.

The trend in employment growth, however, could slow significantly by midyear as expensive credit weigh on consumer spending and ultimately business investment.

The Fed last year raised its policy rate by 4.25 percentage points to the highest level since late 2007. Last month, it projected at least an additional 75 basis points of hikes in borrowing costs by the end of 2023. – Reuters