December Jobs Report Preview: After the Landing

For much of the past two years, economy watchers have agonized over whether or not rising interest rates would tip the U.S. economy into a recession or if monetary policymakers would be sufficiently skilled (and sufficiently fortunate) to engineer a rare so-called “soft landing” – slowing the economy without tipping it into contraction.

As we await the final round of economic data for 2023, it looks like the wheels are just about on the ground. Inflation is approaching its long-term target range – perhaps already at it when the most volatile categories are excluded – and the labor market is seemingly resilient despite visible pockets of weakness.

There are certainly reasons for optimism. The FOMC gave Americans an unexpected gift with their mid-December hint that they could lower interest rates as many as three times in 2024, boosting stock markets with wealth-effect spillovers during the critical holiday shopping days before Christmas.

Here are three trends we'll be watching for in the December jobs report:

With both retirements and immigration running higher than their pre-pandemic trends, the pace of neutral payroll gains – that is, the number of jobs that the U.S. economy needs to add to keep pace with population changes and keep the unemployment rate steady – has declined from where it was just a few years ago: From around 200,000 jobs per month to between 120,000 and 160,000 jobs per month by our estimates.

Three Questions for the Labor Market in 2024

As we close the books on 2023, the natural question to ask is: Where is the U.S. economy and labor market headed after the long-awaited landing? By some assessments, it is the most stable outlook since the start of the Covid-19 pandemic. There are no obvious risks on the horizon from sudden interest rate normalization, fiscal expansion, consumer surges, or supply chain shocks. We see three major questions that will likely be the subject of discussion in 2024.

First, what are the next sources of investment and growth that might drive hiring economy-wide? The safest bet appears to be that business cycle agnostic sectors like healthcare will continue to add to payrolls, and there is likely upside to construction employment as the housing market unlocks from easier financing conditions.

Beyond those two sectors, industries like Professional and Business Services, Information, and Finance could see net neutral headcounts as they seek to finance new investments on their balance sheets rather than through new capital, or even slightly down due to accelerating merger and acquisition efficiencies. Pandemic-era automation advances should keep hiring below trend in sectors like retail, warehousing, and accommodation and food service, while manufacturing hiring faces crosswinds from softer export and consumer demand but stronger military spending amid continuing geopolitical conflicts.

Risk is to the downside for public sector employment in 2024, particularly at the state and local level where there are some emerging signs of fiscal distress – particularly in states that rely heavily on capital gains or property taxes amid a slowing real estate market.

Second, is the unemployment rate still the most informative signal of how tight the jobs market is? The unemployment rate has remained remarkably low as interest rates have increased, layoffs have accelerated, and sentiment-based metrics suggest job seekers are encountering a much more competitive hiring market.

Economists have historically looked to the unemployment rate as the most reliable indicator of slack labor capacity, but with prime age worker participation likely approaching maximum potentials, marginal labor supply is increasingly found at the edges of the age distribution (i.e., among the youngest and among the oldest workers) where workers tend to move between employment and nonparticipation rather than between employment and unemployment. 

Moving forward, it’s possible that changes in labor slack will be more visible in the participation rate than in the unemployment rate.

Third, what is the relationship between immigration and wages? This canonical question in labor economics is likely to be revisited in 2024 amid what is shaping up to be a contentious election cycle and in the aftermath of a sequence of natural experiments during the pandemic – including the temporary shutdown of most immigration mid-2020 and a modestly more restrictive policy during the years immediately preceding the pandemic – providing fertile ground for new empirical evidence on this age-old topic.

Decades of research point to no meaningful aggregate effect on local wages, but also to slower inflation for immigrant-labor intensive services like childcare and residential construction. Many industries that have historically relied on less-educated immigrant workers saw accelerated wage gains during the tight labor markets immediately following the pandemic, but wage growth has slowed and unemployment remained low as immigration increased in 2023.

The post-pandemic era has seen a reevaluation of the longstanding consensus in a number of core economic topics such as global trade and public debt sustainability, with a particular focus on heterogeneous rather than aggregate effects. We could see a reopening of the evidence on immigration and labor markets as well due to the combination of new data and the political climate.