Employment Gains Remain Strong Despite Continued Contraction in Manufacturing Activity

Key Takeaways:

• Nonfarm payroll employment rose by 216,000 in December, according to the Bureau of Labor Statistics (BLS). However, October and November job gains were revised downward by a combined 71,000. The unemployment rate was constant at 3.7 percent but the labor force participation rate pulled back three-tenths to 62.5 percent, its lowest level since February. Wage growth was warm again as average hourly earnings increased 0.4 percent for the second consecutive month, bringing the year-over-year comparison to 4.1 percent.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 62,000 to 8.8 million in November, though October data was revised upward, according to the BLS. The quits rate declined one-tenth to 2.2 percent, its lowest level since September 2020. Layoffs and discharges remained historically low at 1.5 million, compared to the 2019 average of 1.8 million.
• The ISM Manufacturing Index increased 0.7 points to 47.4 in December, still well below the expansionary threshold of 50. While the production index crossed the expansionary threshold with a 1.8-point gain to 50.3, the typically leading new orders index was down 1.2 points to 47.1. After a sharp gain in November, the non-seasonally adjusted prices paid index declined 4.7 points in December to 45.2, indicating ongoing price declines.
• Light vehicle sales increased 4.1 percent to a seasonally adjusted annualized rate (SAAR) of 16.2 million in December, according to Autodata.
• Private residential construction spending, rose 1.1 percent in November, according to the Census Bureau. Spending on single-family and multifamily construction rose 2.9 percent and 0.1 percent, respectively, while spending on improvements declined 0.8 percent.
• The minutes from the Federal Open Market Committee (FOMC) December 12-13 meeting indicated that officials revised their baseline target range for the federal funds rate downward in light of "better-than-expected data on inflation." Still, there was not a clear path set forward for when or how often to cut the policy rate, though all but two officials signaled rates would likely be lower by the end of 2024 in the Summary of Economic Projections.

Forecast Impact:

While the headline payroll number indicated a modest acceleration in job gains in December, the gains were broad-based, with the biggest gains concentrated in less-cyclical sectors, including government and health care. Additionally, the household survey was far less rosy as it showed a decline of 683,000 jobs and 676,000 people leaving the labor force. While the headline job gains number is a strong one, we see some conflicting signals that could indicate the labor market is set to soften in 2024. November’s JOLTS survey was also consistent with cooler labor market conditions and weaker wage growth as the quits rate fell to its lowest level since 2018. Admittedly, the lower quits rate, which is typically indicative of future wage growth, is a bit at odds with two consecutive prints of 0.4 percent month-over-month wage growth, but we continue to believe that wage growth will slow to a level that is more consistent with 2 percent inflation over time.

The ISM manufacturing index continued to signal weakness in that sector, consistent with a slowdown in economic growth in 2024. Still, more positive residential construction numbers and signs of easing financial conditions present upside risk to our current 2024 growth forecast.

Nathaniel Drake
Economic and Strategic Research Group
January 5, 2024

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