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The December employment report was generally encouraging. Nonfarm payroll growth slowed modestly but remained solid with a 223K monthly gain. More importantly for Fed officials worried about the inflation outlook, wage growth cooled in December, and the labor force participation rate ticked higher for both prime age (25-54) and older (55+) workers. Despite the directional improvement in labor supply, the labor market remains exceptionally tight. The unemployment rate fell two tenths of a percentage point to 3.5%, matching its lowest level on record since 1969. It will take more than just this report to convince the FOMC that supply and demand in the labor market are in healthy balance.

The December jobs report brought further signs that the labor market is beginning to soften, but remains incredibly strong. Nonfarm payrolls increased by 223K in December, not far off the Bloomberg consensus forecast of 202K. Revisions to the previous two months were slightly negative on net. The 223K new jobs added in December was the slowest pace of job growth since December 2020, when a surge in COVID cases was weighing on the U.S. economy. Job growth was generally broad-based and was led by leisure & hospitality (+67K), healthcare (+55k) and construction (+28K). Information, which includes many tech-related industries, was an exception with payrolls slipping by 5K. Beyond the downshift in hiring, there were additional signs in the establishment survey that labor demand is gradually cooling. Employment in temporary help services declined by 35K in December and has fallen by 111K since July. The average number of weekly hours worked declined by 0.1 hour to 34.3 in December and also has been falling in recent months. With 12 months of complete data, nonfarm payroll growth averaged 375K per month in 2022, but all signs point to a material slowdown in job growth in 2023.

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