Significantly exceeding expectations! The U.S. added 256,000 non-farm jobs in December, and the unemployment rate fell to 4.1%

The U.S. non-farm payrolls in December were "booming," which further weakened market expectations for the Federal Reserve's interest rate cuts this year. The latest market expectation is that the Fed's next rate cut will be in October.

On January 10th, Friday, the U.S. Bureau of Labor Statistics released data showing that the U.S. added 256,000 non-farm jobs in December, the largest increase in nine months, exceeding the expected 165,000 and surpassing the expectations of nearly all economists surveyed by the media. The previous value for November was revised down from 227,000 to 212,000, while the employment figure for October was revised up by 7,000 to 43,000.

The unemployment rate in December was 4.1%, lower than expected and down from 4.2% in November. The broader unemployment rate, which includes discouraged workers and those who can only find part-time work for economic reasons, fell to 7.5%, a decrease of 0.2 percentage points, marking the lowest level since June 2024.

This non-farm report also included annual revisions to the unemployment rate. Notably, the peak unemployment rate in July was initially reported at 4.3%, which laid the groundwork for the Fed's subsequent rate cuts; this unemployment data has been revised down, indicating that the U.S. labor market was more resilient in the summer than previously thought.

The year-on-year and month-on-month growth rates of average hourly wages were 3.9% and 0.3%, respectively, with the former falling short of the expected 4% and the latter meeting expectations. Non-management employees, who make up the majority of workers, saw their earnings increase by 0.2% from November and by 3.8% from the same period last year, marking the lowest annual growth rate since mid-2021. The Fed is highly attentive to wage growth to assess its impact on inflation. The slowdown in year-on-year wage growth indicates that wage inflation is gradually weakening.

The average workweek in December stabilized again at 34.3 hours.

Looking at the annual data, non-farm employment increased by 2.2 million in 2024, averaging an increase of 186,000 per month; this is lower than the 3 million in 2023, which averaged an increase of 251,000 per month; but higher than the 2 million jobs created in 2019.

The December non-farm report concluded the non-farm data for 2024. Every month last year saw job increases, although the growth was unstable, sometimes raising questions about whether a recession in the U.S. economy was imminent. However, the data from the last two months of last year showed that the labor market remained strong as the Fed considered its next monetary policy moves.

By industry:

• Job growth mainly came from—healthcare added 46,000 jobs; leisure and hospitality added 43,000 jobs; government jobs increased by 33,000; the retail sector also saw considerable growth, adding 43,000 jobs in December, although this sector had lost 29,000 jobs in November before entering the holiday shopping season.
• Manufacturing showed a clear weakness. This sector cut jobs for the fourth time in five months, resulting in a total employment decrease of 87,000 in 2024 The non-farm payroll report consists of two surveys—one targeting businesses and the other households. The household report used by the U.S. Bureau of Labor Statistics to calculate the unemployment rate shows a stronger employment situation. Employment increased by 478,000 in December.

The labor force grew by 243,000, and the labor force participation rate, which is the proportion of the working-age population that is either employed or actively seeking work, remained stable at 62.5%.

Full-time employment increased by 87,000, while part-time employment surged by 247,000.

The number of unemployed decreased by 235,000. The number of permanently unemployed individuals has decreased. The duration of unemployment slightly rose to 23.7 weeks, the highest level since April 2022, while the median duration of unemployment has shortened. The number of individuals unemployed for 27 weeks or longer fell to 1.55 million, a decrease of 103,000. Additionally, the number of workers voluntarily leaving their jobs has increased.

The annual revision of non-farm payrolls will be announced in next month's report. The preliminary estimate for August indicated that employment growth is expected to see the largest downward revision since 2009 for the year ending March 2024. Wall Street Journal mentioned that this significant revision could mean that the U.S. government's statistical agencies have severely overestimated the country's employment figures.

In recent years, employment reports and other government surveys have faced criticism for their declining response rates, leading to significant data fluctuations. Although the initial response rate for December was the highest of the year, the response rate for the entire year of 2024 was only 60.4%, the lowest level since 2002. In the years leading up to the pandemic, this rate was consistently above 70%.

Market Rate Cut Expectations Decline Again

After the release of the non-farm data, market expectations for a rate cut decreased, with the latest expectation being that the Federal Reserve will not cut rates at the policy meeting on January 29, adjusting the timing of the next rate cut to October, with only one rate cut expected this year. U.S. stocks and bonds quickly fell:

• U.S. stock futures plummeted, with the Nasdaq 100 index futures dropping over 1%.
• The yield on U.S. 2-7 year Treasury bonds rose by at least 10 basis points during the day. European bonds fell alongside U.S. Treasuries.
• The U.S. dollar index briefly surged by about 60 points, reporting at 109.73; the Australian dollar against the U.S. dollar fell to its weakest level since 2020.
• Spot gold briefly dropped, reporting at $2,671.35 per ounce.

Analysis and Commentary

Federal Reserve Chairman Jerome Powell previously emphasized that as long as the labor market and economy remain robust, the Federal Reserve can be cautious when considering further rate cuts. At the December meeting, Fed officials believed that the labor market was generally healthy, despite some slowdown. Meanwhile, officials have recently expressed concerns about inflation, which has remained above the Fed's 2% target, primarily due to high housing costs and elevated prices for some goods.

Chicago Fed President Goolsbee stated in an interview with CNBC after the data release that strong non-farm employment does not indicate that the U.S. economy is overheating, and as long as inflation does not rise, he still expects rates to "decline significantly" over the next 12 to 18 months Bloomberg commented that the latest U.S. non-farm data confirms the clear statements made by Federal Reserve officials in recent days: the Fed will pause interest rate cuts for the foreseeable future. This data may support the Fed policymakers' cautious approach this year. The CPI and PPI reports to be released next week will provide more clues about the direction of U.S. inflation. Additionally, the market is highly focused on President-elect Trump's economic agenda, particularly how plans for mass deportations and imposing punitive tariffs on imported goods will affect the labor market.

Bloomberg economist Anna Wong and others stated that the December non-farm employment report is broadly robust. While we expected strong performance in the establishment survey, the significant increase in employment numbers from the household survey, including a drop in the unemployment rate, surprised us. We view this as an encouraging sign that the U.S. labor market may be stabilizing after experiencing deterioration in the second half of 2024.

Bank of America stated that the December employment data could seal the deal for a pause in rate cuts in January. The Fed made a strong hawkish turn at the December FOMC meeting, and a pause in January is clearly the baseline scenario. A close-to-Bank of America's forecast of 175,000 jobs report will solidify this decision. Furthermore, Bank of America believes that if the labor market does not continue to cool gradually, especially if the unemployment rate stabilizes at 4.2% with healthy employment numbers, then the rate-cutting cycle may have already ended.

UBS Global Wealth Management Senior U.S. Economist Brian Rose stated in a report: "Given the overall strength of recent economic data, the Fed has no reason to consider cutting rates in the near term. This would require both the labor market and inflation data to be significantly weaker in the coming months."